El-Saafin v Franek (No 4)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT
TECHNOLOGY ENGINEERING AND CONSTRUCTION LIST

S CI 2018 01685

HASSAN EL-SAAFIN	First Plaintiff
MOHAMAD EL-SAAFIN	Second Plaintiff
v
MARK FRANEK and others according to the Schedule	Defendants

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JUDGE:	LYONS J
WHERE HELD:	Melbourne
DATE OF HEARING:	14 May 2020
DATE OF JUDGMENT:	9 July 2020
CASE MAY BE CITED AS:	El-Saafin & Anor v Franek & Ors (No 4)
MEDIUM NEUTRAL CITATION:	[2020] VSC 389

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CORPORATIONS – Application to bring proceedings on behalf of company in liquidation – Derivative action – Inherent jurisdiction – Relevant criteria – Where leave not opposed by liquidator – Where circumstances favour exercise of discretion to grant leave – Leave granted.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr I Upjohn QC with Mr B Mason	Hicks Oakley Chessell Williams
For the First and Fourth Defendants	Mr J Evans QC with Mr P Miller	Mark J Halse
For the Liquidator of Saafin Constructions Pty Ltd (receivers and managers appointed) (in liquidation)	Mr E Moon	Thomas Egan & Associates
For AAGG Developments Pty Ltd	Mr M Clarke QC	HM Ong Lawyers

HIS HONOUR:

INTRODUCTION

In this application, the plaintiffs seek that the Court exercise its inherent jurisdiction to allow them to pursue claims in the name of Saafin Constructions Pty Ltd (the ‘Company’) which is in liquidation (the ‘inherent jurisdiction application’).

The plaintiffs are shareholders of the Company. They were both directors at the time it was placed into liquidation. Their brother Wael El Saafin is also a shareholder of the Company. The plaintiffs seek leave to pursue claims that, for the most part, are set out in a proposed amended statement of claim dated 3 August 2018, exhibited to the affidavit of Mr Hassan El Saafin sworn 17 September 2019 (‘PASOC’).[1] In summary, those claims seek to challenge:

(1) the amount of debt claimed to be owed by the Company and alleged to be secured by a security interest (including by a mortgage of the substantial asset of the Company (the ‘North Melbourne property’)) pursuant to assignments to the fourth defendant (‘MAG’) by (among others) the first defendant (‘Franek’) in May 2018; and

(2) the sale of the North Melbourne property by MAG as mortgagee to a related party of MAG (‘AAGG’) [2] allegedly in breach of its duties as mortgagee in July 2018.

[1]Exhibit HE-9 to the affidavit of Mr Hassan El Saafin sworn 17 September 2019.

[2]In these reasons, I will refer to Franek, MAG and AAGG collectively as the ‘MAG parties’.

The plaintiffs seek a retransfer of the North Melbourne property. Further, they seek damages as the Company has been deprived of the opportunity to complete the development of the North Melbourne property consisting of 25 apartments and two commercial units (the ‘North Melbourne development’). That development is currently 25% complete.

In summary, the plaintiffs contended that leave ought be granted given:

(1) the strong nature of the claims made in the proceeding and serious issues raised by them;

(2) the liquidator of the Company, Mr Michael Caspaney (the ‘Liquidator’), does not oppose the plaintiffs being granted leave in circumstances where the Company is currently without funds to pursue the proceeding itself or to obtain detailed legal advice regarding the claims made; and

(3) their willingness to indemnify the Liquidator to ensure that he is not exposed to personal liability.

As to any concerns about the solvency of the Company, the plaintiffs contended that any such insolvency was brought about by the circumstances and events giving rise to the claims which are the subject of this proceeding and may be remedied when the proceeding is determined in the plaintiffs’ favour. In any event, they submitted that they have arranged finance which would allow all due and payable debts of the Company to be met and for the completion of the North Melbourne development.

The Liquidator has provided a report to the Court in which he concluded the liabilities of the Company exceed its assets by $4 million. He also concluded that, based on his investigations, the Company had reasonable prospects of recovering damages of approximately $1.2 million against one or more of the MAG parties. While the Liquidator did not oppose leave being granted, he requested that the Court should consider making the grant of any leave conditional on the plaintiffs providing an indemnity supported by liquid assets for his costs incurred to date in this proceeding and future costs in monitoring it.

Franek and MAG opposed the inherent jurisdiction application. So did AAGG. Although it is not yet a party, the plaintiffs wish to join AAGG to the proceeding. As a result, I granted leave for AAGG to make submissions on the application.

The MAG parties opposed the inherent jurisdiction application for the following reasons:

(1) granting leave would be futile as, even if the proceeding is successful, the result will be that the Company will become the registered proprietor of the North Melbourne property but subject to a mortgage in favour of AAGG to secure the true amount which was owed to MAG. In that event, the Company would remain insolvent and would not have sufficient assets to meet its liabilities;

(2) further, the Company has no real prospects of redeeming the mortgage over the North Melbourne property or completing its development. The plaintiffs have not demonstrated that the finance they rely upon will materialise. In any event, the only person with the power to cause the Company to develop the North Melbourne property is the Liquidator and there is no evidence that he is willing to do so; and

(3) there is no evidence that the plaintiffs could satisfy an indemnity for costs sought by the Liquidator or satisfy any security for costs that might be ordered in favour of the MAG parties.

In summary, I have concluded that, subject to the conditions set out below, the Court should exercise its discretion to grant the plaintiffs leave, on behalf of the Company, to bring:

(1) claims substantially in accordance with the PASOC, including the damages claim identified by the Liquidator referred to above and any claims for the recovery of sums received from the sale proceeds; and

(2) claims based on the investigations of the Liquidator that one of the loans allegedly owed to MAG not presently challenged in the PASOC is not enforceable.

This is in circumstances where:

(1) I have concluded that these claims have a solid foundation which raise serious issues about the conduct of MAG parties;

(2) the Liquidator does not oppose leave being granted;

(3) the plaintiffs have already provided an indemnity supported by liquid assets for the Liquidator’s costs incurred to date and the costs in monitoring the proceeding in the future;

(4) the Liquidator does not assert any prejudice to the assets of the Company or the course of the liquidation should these claims be pursued by the plaintiffs; and

(5) I have concluded that the proceeding is likely to result in a tangible benefit to the Company, including the determination of the extent of many disputed debts of the Company (and whether they are secured) and, if successful, an award of damages in favour of the Company in excess of $1.2 million which would then be available to the true creditors of the Company if it remains in liquidation.

It may be that the proceeding also results in the transfer of the North Melbourne property being set aside subject to the debts properly secured against that property. However, I do not consider it is necessary to determine at this stage what would happen in that event, in particular, whether the plaintiffs have in place finance that would allow all due and payable debts of the Company to be met and the completion of the North Melbourne development.

BACKGROUND FACTS
Genesis of allegations

To date, I have delivered three separate reasons for judgment in respect of applications in this proceeding (the ‘previous Reasons’).[3] Many of the facts giving rise to the allegations in the PASOC and relevant to this application have been set out in the previous Reasons. As a result, it is convenient to refer to them.
[3]El-Saafin & Anor v Franek & Ors [2018] VSC 450 (‘Reasons No 1’); El-Saafin & Anor v Franek& Ors (No 2) [2018] VSC 683 (‘Reasons No 2’); El-Saafin & Anor v Franek& Ors (No 3); (2019) 143 ACSR 452; [2019] VSC 155 (‘Reasons No 3’).

In Reasons No 1, I set out the relationship between the parties to this application and their relevance to allegations now contained in the PASOC as follows:

The Company owns various properties including the property at 65–67 Arden Street North Melbourne (the ‘North Melbourne property’) on which is being constructed a development consisting of 25 apartments and two commercial units. The Company entered into a building contract with New Concept Homes Pty Ltd (the ‘Builder’)[4] on 19 April 2015 to develop the North Melbourne property (the ‘Building Contract’). The contract price was $4.4 million. The works did not progress in accordance with the Building Contract. On 5 April 2018, the Company wrote to the Builder terminating the Building Contract.
[4]Which has at all relevant times been controlled by Amr Mekkya (‘Mekkya’).
On 28 October 2016,[5] the Company entered into a series of agreements with Balanced Securities Pty Ltd (‘Balanced Securities’) in relation to an advance of up to $6.2 million to develop the North Melbourne property. These included a Facility Agreement and a General Security Deed (‘GSD’). Each of the plaintiffs, Wael El-Saafin (‘Wael’) and Lobna El-Saafin (‘Lobna’) were guarantors under the Facility Agreement. The Company granted a mortgage over the North Melbourne property which was registered. A second ranking mortgage was also granted over the property at 3 Ball Court, Bundoora (the ‘Bundoora property’) which is the family home of Mohamad.
[5]The date was recorded as 28 October 2018 in Reasons No 1.
On 18 April 2018, Balanced Securities as assignor entered into a Deed of Assignment with Franek or his nominee assigning all its right, title and interest under the Facility Agreement, the GSD and the mortgages (the ‘Balanced Securities assignment’). It recorded that the amount owing under the Facility Agreement as at 18 May 2018 was $2,999,649.30 (the ‘Balanced Securities loan’). Subsequently, Franek nominated MAG (which was incorporated on 26 April 2018) as the assignee.
On 9 April 2018, Franek purported to appoint the second and third defendants as the receivers of the Company pursuant to the terms of a separate General Security Agreement dated 18 May 2017 between Wael, Bayda El Saafin and Franek in relation to an advance from Franek to Wael of $311,000 in January 2016 (the ‘Franek loan’ and the ‘Franek GSA’). The Company granted a mortgage over the property at 2 Lynwood Crescent Lower Plenty in support of the Franek loan (the ‘Lower Plenty property’ and the ‘Lower Plenty mortgage’). The Lower Plenty property is the former family home of the plaintiffs and where they grew up but has since been rented out.
The plaintiffs challenged the basis upon which the Receivers were appointed under the Franek GSA and raised these issues with both Franek and the Receivers. On 3 May 2018, Franek assigned all his right, title and interest in the Franek GSA (including the Lower Plenty mortgage) to MAG. On 4 May 2018, Franek and/or MAG instructed the Receivers to resign. On 7 May 2018, the Receivers did so. However, on that day, they were re-appointed by MAG as the receivers of the Company under the GSD.
From 9 May 2018, the plaintiffs sought details of the payout figure of the Balanced Securities loan to terminate the Receivers’ appointment under the GSD both from the Receivers and from Franek and MAG. Those details were not provided until 25 June 2018. There has been no explanation as to why the details could not be provided, particularly in light of the figure contained in the Balanced Securities assignment.
On 25 June 2018, the solicitor for Franek and MAG, Mark Halse (‘Halse’), advised the plaintiffs that the payout figure was $8,259,990.83. The reason for the enormous difference between this amount and the Balanced Securities loan (ie $2,999,649.30) referred to in the Balanced Securities assignment was threefold. First, the Balanced Securities loan, including interest and costs, had grown to $3,265,742.82. Second, the amount claimed included the Franek loan plus interest, then totalling approximately $1,140,000. Third, it included the 20 June debts of $3,579,105.03. On 20 June 2018, MAG entered into assignments in respect of these debts allegedly owing by the Company.
The 20 June debts were made up as follows:
(1)a debt allegedly owed to Mekkya in his personal capacity of $982,848.22;
(2)a debt allegedly owed to Mekkya trading as ‘New Concept Designs’ of $174,907.59;

(3) a debt allegedly owed to the Builder of $521,349.22; and
(4) a debt allegedly owed to George Sacca of $1,900,000.
On 27 June 2018, the plaintiffs offered to pay out the Balanced Securities loan claimed by MAG on the basis that the North Melbourne mortgage be discharged. MAG and the Receivers maintained that the Balanced Securities loan, the Franek loan and the 20 June debts were all the subject of the security.
On 27 June 2018, on the application by the plaintiffs, I made interim orders restraining the Receivers and Franek (including in his capacity as a director of MAG) from taking steps to realise, sell or otherwise dispose of the ‘Securities’ as that term is defined in the Facility Agreement. At that time, the Receivers were threatening to sell the Lower Plenty property.
The interlocutory application came on for hearing before Kennedy J on 3 July 2018. Her Honour dissolved the interim orders but the Receivers gave an undertaking not to sell the ‘Securities’ as that term is defined in the Facility Agreement until the determination of the interlocutory application.
The interlocutory application came on for hearing again on 17 July 2018 before Kennedy J. On that day, the Receivers gave an undertaking in a similar form until the determination of the interlocutory application which was then fixed for 7 August 2018.
One of the issues before her Honour on 17 July 2018 was whether the Receivers were purporting to exercise powers as mortgagee to sell the assets of the Company. This was because the defendants contended no injunction should be granted unless the plaintiffs tendered the full amount which MAG asserted was secured (including the 20 June debts) based upon Inglis v Commonwealth Trading Bank of Australia (‘Inglis’). Her Honour made orders for Franek and MAG to provide a memorandum setting out the precise basis upon which the Receivers were entitled to sell the North Melbourne property and the Lower Plenty property. Her Honour also made orders for the filing of material and submissions for the interlocutory application to be heard on 7 August 2018.
At the hearing on 17 July 2018, Kennedy J was not informed that, on 9 July 2018, MAG had entered into a contract with AAGG Developments Pty Ltd (‘AAGG’) to sell the North Melbourne property for $4,500,000 with settlement to take place on 20 July 2018. AAGG was registered on 5 July 2018. Mekkya is the sole director of AAGG. The shareholders of AAGG are Mekkya and Sacca. As noted above, Mekkya controls the Builder, and the Builder, Mekkya and Sacca assigned debts alleged owed by the Company to MAG on 20 June 2018 (ie the 20 June debts). The circumstances of the sale to AAGG and the relationship between Franek, MAG, AAGG, Mekkya and Sacca have not been explained. I note that counsel for the plaintiffs submitted that “MAG” in fact represents the initial of the first name of each of Franek, Mekkya and Sacca.
On 19 July 2018, Halse filed a memorandum pursuant to the orders of Kennedy J to the effect that the Receivers were in possession of the North Melbourne property and the Lower Plenty property under the terms of the GSD and not under the terms of the mortgages granted pursuant to the GSD. It is now plain that MAG had exercised powers as mortgagee of the North Melbourne property by entering into the contract of sale on 9 July 2018. It has not been explained why MAG and Franek did not inform the court of the contract to sell the North Melbourne property either at the hearing on 17 July 2018 or in the 19 July memorandum. It may be that the court would have had a very different view about the adequacy of the undertakings of the Receivers if it had been informed of these matters.
Settlement of the sale of the North Melbourne property took place on 20 July 2018 when the purchase price was paid. Halse acted as solicitor for both MAG as vendor and AAGG as purchaser. This is evident from the transfer of land signed by Halse for both MAG and AAGG. That transfer is in fact dated 22 June 2018. Mr Halse has deposed this date was ‘human error’ and that the transfer was not prepared until 20 July 2018.
In any event, neither the sale nor the settlement of the sale of the North Melbourne property was known to the plaintiffs. On 19 July 2018, the solicitors for the plaintiffs wrote to Halse stating the plaintiffs were ready, willing and able to settle the Franek loan, the Balance Securities loan and associated costs at 3pm on 25 July 2018 in return for a release of the North Melbourne mortgage. Halse did not reply to that letter until 25 July 2018 when he advised the plaintiffs that MAG had exercised its power of sale over the North Melbourne property for $4,500,000.
As noted above, on 27 July 2018, Franek resigned as a director of MAG and transferred his shares in MAG to Mekkya and Mekkya became the sole director of MAG. The reason for this has not been explained.
On 3 August 2018, MAG appointed administrators to the Company under s 436C of the Corporations Act 2001 (Cth) (the ‘Act’).[6]

[6]Reasons No 1 (n 3) [7]–[25] (citations omitted). For convenience, in these reasons I will adopt the terms defined in this passage.

As is evident from these passages, one of the principal issues for determination in this proceeding is the amount of debt subject to the security interest of MAG. This is in circumstances where MAG and the Receivers asserted for the first time in late June 2018 that the debts of the Company secured in favour of MAG totalled over $8,250,000 and relevantly included the 20 June debts assigned to MAG of approximately $3.6 million on 20 June 2018. Unknown to the plaintiffs, the 20 June debts were assigned on that date to MAG by Mekkya, the Builder and New Concept Designs (each of which Mekkya has controlled at all relevant times) and Sacca, a business associate of Mekkya. The purpose of the assignment was to seek to obtain security for the 20 June debts which would otherwise not be secured.

To date, the plaintiffs have accepted that the debts of the Company which were due, payable and secured in favour of MAG were the Balanced Securities loan of approximately $3.2 million and the Franek loan of approximately $1.2 million (each including interest as at the end of July 2018). However, they have disputed that the 20 June debts were secured or that they were due and payable in July 2018. As noted above, by their solicitors’ letter dated 19 July 2018, the plaintiffs sought to tender the amount of the Balanced Securities loan and the Franek loan then outstanding on 25 July 2018, but were prevented from doing so by the sale of the North Melbourne property by MAG to AAGG.

It is significant then that the proceeds of sale of the North Melbourne property in the sum of $4,454,732.09 (the ‘sale proceeds’) were applied by MAG for the most part to satisfy the 20 June debts rather than the debts which were acknowledged by the plaintiffs to be due and secured. The solicitor for the MAG parties, Mr Mark Halse, in an affidavit sworn 6 August 2018 deposed that the sale proceeds were dispersed in total as follows:

(1) $1,900,000 to repay the amount allegedly owed to Sacca;

(2) $521,349.22 to repay the amount allegedly owed to the Builder;

(3) $174,907.59 to repay the amount allegedly owed to New Concept Designs;

(4) $371,055.52 to pay enforcement costs; and

(5) $1,487,419.76 to pay the amount allegedly owed to MAG in respect of the Balanced Securities loan.

In the PASOC, the plaintiffs dispute the 20 June debts and seek a declaration that the security interest of MAG over the assets of the Company are discharged upon the tender of the debt of the Franek loan and the Balanced Securities loan.

Another principal issue in this proceeding relates to the sale of the North Melbourne property by MAG as mortgagee to AAGG by private sale for the sum of $4.5 million. The plaintiffs seek to challenge that sale in this proceeding. In the PASOC, they allege that the sale and transfer is of no effect or should be set aside:

(1) by reason of the failure to serve on the Company a notice pursuant to s 76 of the Transfer of Land Act 1958 (Vic);

(2) because the transfer to AAGG was made in bad faith, was not an independent bargain and/or was made at undervalue; and/or

(3) because MAG exercised its powers of sale as mortgagee in breach of s 420A of the Act and/or in breach of its common law duty to exercise the power of sale in good faith.

The restraining orders and Reasons No 1

On 7 August 2018, I made interlocutory orders restraining the MAG parties from taking further steps to enforce any securities and restraining AAGG from dealing with the North Melbourne property (the ‘restraining orders’). My reasons for doing so were delivered on 15 August 2018 and comprise Reasons No 1. Relevantly, I concluded that there was a serious question to be tried as to whether:

(1) the 20 June debts are validly the subject of MAG’s security interest; and

(2) the sale and transfer of the North Melbourne property to AAGG should be set aside.[7]

[7]Reasons No 1 (n 3) [35].

Indeed, this was conceded by senior counsel for the MAG parties at that time.[8] Further, I expressed the view that:

(1)there appeared to be a reasonably strong case that the 20 June debts were not validly the subject of MAG’s security interest;[9] and
(2)while I was not able to form any view about the strength of the claim in relation to the transfer of the North Melbourne property to AAGG, the circumstances in which the 20 June debts were assigned, the North Melbourne property was sold, and Mekkya became the director and shareholder of MAG, raise serious issues about the conduct of Franek, MAG, Mekkya and Sacca.[10]

[8]Reasons No 1 (n 3) [34].

[9]Reasons No 1 (n 3) [37].

[10]Reasons No 1 (n 3) [41].

I did note however that MAG and Franek produced valuations for the North Melbourne property that were consistent with the sale price.[11]
[11]Reasons No 1 (n 3) [41].

I also concluded that the balance of convenience favoured the grant of the injunction without payment into Court of the full amount claimed by MAG to be secured. This was because, among other things:

(1) the amount of the secured debt was in issue in the proceeding;

(2) by reason of the sale of the North Melbourne property on 20 July 2018 in the circumstances set out above, the plaintiffs were deprived of the opportunity to tender the sum offered by them on 19 July 2018 (i.e. the Franek loan and the Balanced Securities loan) which would have brought into question whether MAG’s power of sale had arisen; and

(3) in any event, as a result of that sale, MAG received from the sale of the North Melbourne property, in effect, the full amount alleged by it to be owed save for the 20 June debts.

On 7 August 2018, I adjourned the further hearing of the proceeding to enable the administrators of the Company to consider whether they wished to pursue this proceeding, and if not, whether they would consent to the plaintiffs pursuing the proceeding under s 440D of the Act.

Further applications and Reasons No 2

The administrators did not consent to the plaintiffs having leave to prosecute this proceeding. Rather, by summons dated 11 September 2018, amended on 25 October 2018, the administrators sought directions from the Court that they were justified in having entered into 2 deeds executed by the administrators on 7 September 2018 and 24 October 2018. The effect of these deeds was to assign to Trade On Pty Ltd (‘Trade On’) (whose directors and shareholders were Mekkya and Sacca) all claims made in the proceeding available to the Company against MAG, AAGG or Trade On for the sum of $100,000. The administrators sought such directions before the second creditors’ meeting then fixed for 12 November 2018 (the ‘second creditors’ meeting’).

Further, by summons dated 30 August 2018, amended on 26 October 2018, the plaintiffs sought leave to bring this proceeding on behalf of the Company while in administration pursuant to s 237 of the Act, the inherent jurisdiction of the Court, or alternatively r 90-15 of the Insolvency Practice Schedule (Corporations), being Schedule 2 of the Act (the ‘Insolvency Practice Rules’).

Further evidence was filed in support of these applications relating to the principal allegations in this proceeding. The relevant facts are set out in [21]-[30] of Reasons No 2. In summary, that evidence was to the effect that a plan had been developed by Mekkya and Sacca from about 2018 to take control of the North Melbourne property and its development by acquiring, and exercising, the rights of the Company’s secured creditors (the ‘Plan’).

Relevantly, the evidence included that:

(1) on 24 July 2018, Mekkya told Dr Atalla that the North Melbourne property had been sold to AAGG and that he was very happy ‘as he believed he had found a way to go around the Court’s orders to achieve this’. As noted in Reasons No 1, Kennedy J was not informed of this purported sale at the hearing on 17 July 2018;[12] and

(2) on 30 July 2018, Mekkya told Dr Atalla that Mekkya was ‘planning a surprise for the Saafin brothers in Court as he was in the process of appointing an administrator’ and he would ‘sell all the El Saafin houses and the rest of their assets to prevent them financially from making a claim against him’.[13]

[12]Reasons No 2 (n 3) [28].

[13]Reasons No 2 (n 3) [29], [137].

The MAG parties did not file any material to dispute this evidence. Indeed, as noted in Reasons No 2:

… senior counsel for the defendants acknowledged that to achieve the commercial goal of getting the money Mekkya and Sacca alleged they were owed by the Company, Mekkya and Sacca through the MAG parties (as he submitted they were legally entitled to do):
(1)acquired first mortgage rights in respect of the Balanced Securities loan and the Franek loan that were assigned to MAG (which was set up for this purpose);

(2) assigned the 20 June debts owing to them to MAG;
(3) appointed the Receivers;
(4)appointed the Administrators, one of the purposes of which was to seek to purchase the claims made or which could be made against the MAG parties and to validate the exercise of MAG’s power of sale of the North Melbourne property to AAGG; and
(5)purchased those claims against them by assignment from the Administrators after a process in which the plaintiffs took part.[14]

[14]Reasons No 2 (n 3) [22].

I note that in support of the current application, the MAG parties relied upon the affidavits, among others, sworn by Mekkya on 3 December 2019, 2 April 2020 and 11 May 2020 and upon the affidavit of Mr Halse (the then current solicitor for the MAG parties) sworn on 24 October 2019. These affidavits do not dispute or challenge the evidence relating to the Plan set out in Reasons No 2.

In Reasons No 2, I dealt with both these applications. As to the administrators’ application, I concluded that the Court did not have the power to make the orders sought as the administrators were seeking ratification of action already taken. Further, I concluded that, even if the Court had power, I would have declined to make the orders sought in the exercise of my discretion. In substance, I was not satisfied that the assignment of the Company’s claims against the MAG parties to the MAG parties, or releases in respect of them, was proper in all the circumstances and therefore just and beneficial for the administration of the Company.

This was in circumstances where, among other things, I could not conclude that the price was fair and reasonable given that the administrators had not obtained any independent advice of the claims in fact made or their likely worth. This was in the context of my conclusions in Reasons No 1 as to the merits of those claims as set out above. I further concluded that there was a reasonably strong case against MAG and the Receivers that they had breached their duties to the Company in failing to provide the payout figure in respect of the Balanced Securities loan from 9 May to 25 June 2018 (during which period the 20 June debts were assigned), and then exercising their powers based on those assignments.[15]
[15]Reasons No 2 (n 3) [128]–[129].

I also concluded that I was not satisfied, despite the submissions of senior counsel for the MAG parties, that all the steps in the Plan were lawful. I referred to my comments regarding the claims made in the proceeding and their strengths.[16] I did not accept the submission of senior counsel for the MAG parties that the claim in the PASOC would produce little or no benefit to the Company, noting that there were claims for damages, equitable compensation and account in respect of breaches of duty by the Receivers, MAG and AAGG, including damages flowing from the Company being prevented from continuing with the North Melbourne development since early May 2018.[17]
[16]Reasons No 2 (n 3) [135]–[137].
[17]Reasons No 2 (n 3) [126].

Further, I concluded that the evidence raised real and serious issues about whether the appointment of the administrators by the MAG parties was for a collateral purpose, namely to purchase the claim against the MAG parties from the administrators and thereby prevent the plaintiffs or the Company from prosecuting the proceeding.[18] However I did not reach any conclusions about this given that there was no application to terminate the administration.
[18]Reasons No 2 (n 3) [130].

As to the plaintiffs’ application, I concluded that:

(1) section 237 of the Act did not apply to a company in administration; and

(2) I would not exercise my discretion under the inherent jurisdiction of the Court in favour of the plaintiffs at that time given the imminent second creditors’ meeting on 12 November 2018.

As a result, I adjourned the plaintiffs’ application for leave under the inherent jurisdiction of the Court and pursuant to r 90‑15 of the Insolvency Practice Rules until after the outcome of the second creditors’ meeting on 12 November 2018.

As part of my reasoning in Reasons No 2, I reached some conclusions relevant to the determination of this application. I will return to these conclusions later in these reasons.

Appeal in respect of second creditors’ meeting and Reasons No 3

Mr Glavas, one of the administrators, acted as chair of the second creditors’ meeting on 12 November 2018. At that meeting, the creditors whose proofs of debts were admitted by Mr Glavas voted by value, but not by number, to place the Company into liquidation. As a result, Mr Glavas used his casting vote as chair of the meeting to resolve to place the Company into liquidation. Mr Glavas was originally appointed as liquidator, notwithstanding the views I expressed about the administration in Reasons No 2. He was later replaced by the current Liquidator.

The plaintiffs appealed against Mr Glavas’ decision to admit and reject various proofs (the ‘appeal’). In an amended summons filed on 10 December 2018, the plaintiffs also sought an order for the winding up of the Company to be terminated pursuant to s 482 of the Act (the ‘termination application’). However, at the hearing of the appeal, senior counsel for the plaintiffs advised that the plaintiffs did not wish to pursue the termination application at that time. Rather, if the appeal was successful, the plaintiffs sought orders in effect reversing the decision of Mr Glavas in relation to certain proofs and that the Liquidator of the Company call a meeting of the Company’s creditors in order for the Company to resolve whether it should remain in liquidation.

In Reasons No 3, I concluded that on the evidence then before me:

(1) a number of proofs of debt which had been rejected by Mr Glavas (including of persons associated with the plaintiffs) should have been admitted;

(2) some proofs of debt admitted should have been rejected, including a proof of debt of Mekkya of $1,560,000; and

(3) the proof of debt lodged by MAG (which represented the balance of all moneys allegedly owed by the Company to MAG less the sale proceeds) admitted in the sum of $3,768,023 should only have been admitted for a nominal value.

As a result, I concluded that it was very likely that the creditors who were properly entitled to vote at the second creditors’ meeting would have voted by number and by value against placing the Company into liquidation and in favour of a resolution ending the administration of the Company.

However, as I had concerns about the solvency of the Company, on 21 March 2019, I directed that by 3 May 2019 the Liquidator provide a report to the Court on the solvency of the Company pursuant to r 90-15 of the Insolvency Practice Rules, or alternatively s 482 of the Act. Further, I directed the Liquidator in the report, to the extent he was able, to address whether each of the 20 June debts were a liability of, or due and payable by, the Company at the time those debts were repaid from the sale proceeds and, if so, whether any such liability was subject to a counterclaim or set-off.

Events since Reasons No 3

The preparation of that report took some time. That was due, in part, to the fact that the MAG parties did not provide any documents in support of the proofs of debt they lodged until 1 May 2019, two days before the report was due, comprising a 52-page memorandum and 2,100 pages of materials. The final report is dated 3 August 2019 and was provided to the Court on 5 August 2019 (the ‘Liquidator’s Report’). In summary, the Liquidator concluded that the Company was insolvent. I will return to the detail of the Liquidator’s Report later in the reasons.

Notwithstanding the Liquidator’s Report, the plaintiffs sought to pursue the termination application. This was on the basis, among others, that the plaintiffs through a company called 65 Arden Street Pty Ltd (‘65 Arden’), of which the sole director and shareholder is Wael El Saafin, had obtained finance for the purposes of repaying the debts of the Company that were due and payable and also for the purposes of completing the North Melbourne development (the ‘plaintiffs’ proposal’). Under the plaintiffs’ proposal, finance could only be provided if the financiers could obtain a registered first mortgage over the North Melbourne property. Of course, that could only be provided in the event that the transfer to AAGG was set aside in this proceeding.

To address this difficulty, the plaintiffs sought orders in the termination application that the North Melbourne property be reconveyed immediately to the Company upon payment of the amount owing under the mortgage. When the termination application came on for hearing on 5 December 2019, I raised with senior counsel for the plaintiffs whether the Court had the power to make orders reconveying the North Melbourne property to the Company before the claims made in the proceeding were heard and determined. Senior counsel for the plaintiffs frankly conceded there was no such power. As a result, the termination application was adjourned for the plaintiffs to consider their position.

The plaintiffs now seek leave to pursue the proceeding under the inherent jurisdiction of the Court. However, they rely upon much of the same material as in the termination application, including the plaintiffs’ proposal.

It is also relevant to note that, on 5 December 2019, the MAG parties made an application to vary the terms of the restraining order. At the hearing on 5 December 2019, they indicated they wished to pursue that application on the adjourned date. However, it was not pursued after that time. Rather, by summons filed 17 April 2020, AAGG sought orders to vary and discharge the restraining order. That application has been adjourned until after the hearing and determination of this application.

MATERIAL RELIED UPON

Both the plaintiffs and MAG parties relied upon a large volume of affidavit material in respect of this application: the plaintiffs relied upon 15 affidavits and the MAG parties relied upon 19 affidavits. Indeed, in a list of documents relied upon, Franek and MAG listed the following affidavits which comprise over 4 folders with double-sided printing:

(1) the affidavit of Harish Nair sworn 27 June 2018;

(2) the affidavit of Harish Nair sworn 2 July 2018;

(3) the affidavit of Mark Franek sworn 2 July 2018;[19]
[19]This affidavit has not been filed despite raising its unfiled status at the hearing on 14 May 2020. However an unfiled copy of the affidavit was provided to the Court at around the time it was sworn and I proceeded with the hearing on 14 May 2020 as if the affidavit had since been filed.

(4) the affidavit of Mark Halse sworn 6 August 2018;

(5) the affidavit of Harish Nair sworn 5 September 2018;

(6) the affidavit of Mark Halse sworn 16 September 2018;

(7) the affidavit of Ivan Glavas sworn 11 September 2018;

(8) the affidavit of Harish Nair sworn 15 October 2018;

(9) the affidavit of Christopher Charles sworn 5 December 2018;

(10) the affidavit of Harish Nair sworn 10 December 2018;

(11) the affidavit of Harish Nair sworn 25 January 2019;

(12) the affidavit of Harish Nair sworn 13 February 2018;

(13) the Liquidator’s Report;

(14) the affidavit of Wael El Saafin sworn 17 September 2019;

(15) the affidavit of Mark Halse sworn 24 October 2019;

(16) the affidavit of Amr Mekkya sworn 3 December 2019;

(17) the affidavit of the Liquidator sworn 4 December 2019;

(18) the affidavit of the Liquidator sworn 10 March 2020; and

(19) the affidavit of Amr Mekkya sworn 11 May 2020.

Given the volume of this material, I informed counsel for all of the parties that I would only refer to material that I was taken to in the course of argument or in written submissions.

In the course of argument, senior counsel for the plaintiffs relied upon the following affidavits, in reverse chronological order:

(1) [4]–[28] of the 19th affidavit of Harish Nair sworn 13 May 2020;

(2) [4]–[11] of the 18th affidavit of Harish Nair sworn 13 March 2020;

(3) the affidavit of the Liquidator sworn 10 March 2020;

(4) the affidavit of Hassan El Saafin sworn 12 December 2019;

(5) [13]–[14] of the 17th affidavit of Harish Nair sworn 2 December 2019;

(6) [10]–[17] of the 16th affidavit of Harish Nair sworn 13 November 2019 and exhibit HN-3 thereto;

(7) [3]–[9] and [11]–[28] of the affidavit of Hassan El Saafin sworn 17 September 2019 and exhibit HE-6 thereto;

(8) [4]–[11] of the affidavit of Wael El Saafin sworn 17 September 2019 and exhibit WE-2 thereto;

(9) [3]–[5] of the 15th affidavit of Harish Nair sworn 13 February 2019;

(10) [11] of the 13th affidavit of Harish Nair sworn 13 November 2019 and exhibit HN-4 thereto; and

(11) [4]–[14] of the affidavit of Mahmoud Hegazy sworn 14 September 2018.

For the most part, that material related to:

(1) establishing the factual background of the North Melbourne development, the claims made in the proceeding and the conduct of the defendants in pursuing the Plan; and

(2) the solvency of the Company and the financial ability of the plaintiffs to obtain finance and complete the development of the North Melbourne property.

As to the first of these categories, much of the evidence relied upon has been addressed in the summary of my previous Reasons referred to above. There have been few material changes in the evidence in relation to these matters and none which would cause me to alter the views that I had set out therein.

As to the second category, I considered the financial ability of the plaintiffs to obtain finance and complete the North Melbourne development as at late October 2018 in Reasons No 2 at [87]–[99]. This included a purported agreement by Black Arrow Developments Pty Ltd (‘Black Arrow’) to lend $5 million to 65 Arden and/or Wael El Saafin. As those reasons record, I was not satisfied on the evidence before me at that time that the plaintiffs or their associates had funds available to them to complete the development of the North Melbourne property. Further evidence has been filed since that time. It will be necessary to consider that evidence in due course.

For the most part, the material relied upon by the MAG parties both in written submissions and in oral argument related to:

(1) the insolvency of the Company; and

(2) even if the transfer to AAGG was set aside, the practical inability of the plaintiffs to obtain finance, then to redeem the mortgage and/or to complete the development of the North Melbourne property.

I will deal with these matters in due course.

The Liquidator relied upon the Liquidator’s Report, as updated by exhibit MJC-1 to the Liquidator’s affidavit sworn 10 March 2020, which is a revised Annexure 4 to the Liquidator’s Report. In summary, the Liquidator is of the opinion that the Company is insolvent with a deficiency of assets over liabilities of approximately $4 million.

The Liquidator also relied upon his affidavit sworn 10 March 2020 in which he deposed that:

(1) the liquidation is currently without funds;

(2) as set out in the Liquidator’s Report, based on his investigations, the Company has a claim for damages against the defendants and AAGG (excluding the administrators) for at least $1,203,957.79;

(3) given the financial position of the liquidation, the Liquidator has not been able to obtain detailed legal advice regarding the Company’s claims;

(4) if the liquidation was financial, prior to commencing proceedings, the Liquidator would likely review documents, conduct public examinations (including of the directors, the Builder, the building consultants, the Company’s lawyers and its financiers) and take advice;

(5) the Liquidator has made no requests of the plaintiff for litigation funding given the plaintiffs themselves have indicated a wish to prosecute the proceeding;

(6) preliminary discussions with litigation funders indicate they would not be interested in funding the Company to pursue the claims in the proceeding. However, those funders have indicated some interest in purchasing the claims outright for no more than 5–10% of the value of the claims: as a result, the return to stakeholders would not be sufficient to encourage the Liquidator to consider any such sale as a first option in the liquidation;

(7) the Liquidator was not opposed to the plaintiffs being granted leave to pursue the claims in this proceeding subject to a satisfactory indemnity supported by liquid assets in respect of the Liquidator’s costs incurred to date in this proceeding ($18,000), cost of this application (in excess of $19,000) and costs of monitoring the future conduct of the proceeding (estimated at $20,000). This was in addition to the costs of the Liquidator’s Report which the plaintiffs had agreed to pay; and

(8) if the plaintiffs’ application is dismissed, it is likely the Liquidator will seek to explore litigation funding if discussions held with the prospective defendants to such claims are unfruitful.

THE LIQUIDATOR’S REPORT
Basis of Liquidator’s Report and Company’s insolvency

Before considering the other material and submissions of the parties, I wish to comment upon the Liquidator’s Report. It is important to note the limitations contained in the Liquidator’s Report. It records that, due to the lack of substantiation of many of the proofs of debt lodged and complex legal questions that remain undetermined, the Liquidator has not been prepared to adjudicate officially the proofs of debt lodged: each claim has only been classified as verified on the Company’s statement of financial position rather than admitted.

Further, he noted the discrepancies between the Company’s financial reports and the proofs of debt. He considered one of the main reasons was that many transactions entered into by the Company were in cash. This included deposits paid for the purchase of units in the North Melbourne development without apparent compliance with the Sale of Land Act 1962 (Vic). The Liquidator formed the view that the books and records of the Company are not compliant with s 286 of the Act.

Notwithstanding these issues, the Liquidator has concluded that the Company is insolvent. As at the date of the Liquidator’s Report, he considered that the deficiency of assets over liabilities was approximately $2.8 million. As at 4 December 2019, in light of further investigations, he formed the view that the deficiency of assets over liabilities was approximately $4 million.

The Liquidator formed the view that the creditors of the Company comprise two main ‘camps’: the MAG parties, and a large number of creditors associated with the plaintiffs. The Liquidator noted that, while there was a general feeling among creditors associated with the plaintiffs that they would postpone their demands for payment for a return of their deposits (believing this would aid in the Company being handed back to the directors), the MAG parties remain determined that the Company remain in liquidation. He noted that, in either scenario of the Company remaining in liquidation or being returned to the control of the directors, ongoing disputation between the two camps is ‘probably inevitable’. In this context, the Liquidator expressed the view that, if he were required to make a recommendation to creditors about the future of the Company, he could not find any reason why he would recommend anything other than that the Company remain in liquidation.

The liabilities of the Company

As at 4 December 2019, the Liquidator concluded that the assets available to the creditors of the Company totalled $164,324 with the Liquidator’s costs and expenses to that time totalling $325,572. Further, the Liquidator considered that there were unsecured creditors of the Company totalling $3,902,574 as follows:

Alleged Creditor

Amount Claimed

Amount accepted

1

MAG (Balanced Securities)

$2,826,690

0

2

MAG (Franek)

$1,375,000

0

3

Mekkya debt

$1,066,438

$1,004,017

4

Mekkya

$1,560,000

$290,000

5

Ali Abou-Eid

$50,000

0

6

Calliden Insurance

$200,000

$200,000

7

Evelyn Yelda

$150,000

$150,000

8

Hassan El Saafin

$222,466

$222,466

9

Helmy Ramahi

$20,000

$20,000

10

Mahmoud Hegazy

$540,000

$353,000

11

Mahmoud Ramahi

$354,000

$0

12

Mersal Nasser

$40,076

$0

13

Dr Atalla

$550,000

$342,000

14

Mohamad El Saafin

$950,000

$0

15

Muhamed Al Zubeidi

$306,001

$256,001

16

Omar Ibaida

$520,000

$300,000

17

Osam Bakhityar

$430,000

$281,000

18

Taxline group

$44,000

$43,987

19

Trustworthy Nominees

$470,000

$390,076

20

Wael El Saafin

$757,000

$50,000

$12,709,671

$3, 902,574

There are a number of observations to make about this list of creditors (‘Creditors List’). First, it does not include the 20 June debts that were paid from the sale proceeds. These were addressed separately by the Liquidator and I will deal with them below. Second, the MAG parties’ debts are the first four entries on the Creditors List. The El Saafin brothers are entries 8, 14 and 20. The creditors associated with the plaintiffs appears to be those at entries 5, 7, 9, 10, 11, 13, 16, 17 and 18 on the Creditors List. This is based on the affidavit of Dr Mahmoud Hegazy sworn 17 September 2019 who holds the proxy for these alleged creditors in respect of the liquidation.[20]
[20]Many of these debts relate to deposits paid for units in the North Melbourne development. Most have indicated that they withdraw their right to rescind the relevant sale contract: [33] and Ex MH 7.

Third, in the inherent jurisdiction application, the plaintiffs and the MAG parties disputed one or more of these conclusions by the Liquidator in so far as it prejudiced their respective interests. I will deal with these further below.

Fourth, I considered some of these alleged debts in Reasons No 3 on the basis of the evidence then before me. Many of the Liquidator’s conclusions correspond with those which I reached. However, I am conscious that the material before the Court in Reasons No 3 and before the Liquidator was different and, in each case, not complete.

Fifth, MAG is no longer claiming to be a secured creditor of the Company in respect of its proof of debt which relates to the unpaid portion of the Balanced Securities loan and the Franek loan.[21]
[21] This is confirmed at [72] of the Liquidator’s Report.

The 20 June debts

In relation to the 20 June debts, the Liquidator noted that, as most of these debts had been repaid from the sale proceeds, there were no proofs of debt submitted in relation to the 20 June debts and limited documentation was available. However, based on the documentation available and his own investigations, the Liquidator concluded as follows:

(1) the Builder or 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. It was not secured and is subject to a counterclaim or set-off by the Company;

(2) 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 is subject to a counterclaim or set-off by the Company;

(3) 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 and was not subject to any set-off; and

(4) 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 subject to a counterclaim or set-off.

I note that each of these debts is disputed in the PASOC as being due and payable or secured.

As to the Builder or New Concept Homes debt of $521,349.22, the Liquidator was not satisfied by the documentation provided by the MAG parties in respect of it. The Liquidator concluded the only verified claim related to outstanding GST in the order of $110,000, but that possible defective work claims cast doubt on whether the sums were due and payable by the Company.

As noted, the plaintiffs dispute this debt. Under the Building Contract, the work was to be completed by 1 June 2017. However, by 28 March 2018, quantity surveyors certified that the Builder’s work was only approximately 25% complete. There was a revised forecast completion date of 4 December 2018. Notices for failure to complete work and for delay were issued by the Company and, as a result, on 5 April 2018, the Company terminated the Building Contract.

The Company obtained a report of BSS Group Pty Ltd dated 20 April 2018 which identified considerable defects in the work performed by the Builder including serious problems with the external wall cladding and framing in levels 1, 2 and 3, which BSS considered required major or complete demolition and reconstruction to rectify. The Company also obtained a further defects report from Roscon Property Services dated 30 April 2019 which also identified considerable defects including in relation to the external cladding and timber framing.

On 6 April 2018, the Builder gave notice of an application against the Company in this Court seeking an urgent injunction to prevent the Company from taking possession of the North Melbourne property. A standstill was agreed between the parties. On 9 April 2018, the Builder filed an originating motion. On 30 April 2018, the Court ordered the Builder to file a statement of claim by 2 May 2018. On 22 June 2018, the Court ordered the Builder to file and serve an amended statement of claim. None has been filed. This is likely due to the Company being placed into administration and then liquidation.

As to the New Concept Designs debt, the Liquidator was not satisfied by the documentation provided by the MAG parties in respect of it. He concluded it was not due and payable on the basis it is subject to claims for defective work or incomplete design works based on a QS Report (which I understand to be a quantity surveyors report) commissioned by Balanced Securities.

As to the Mekkya debt, the Liquidator’s Report records that:

(1) the genesis of the debt was an investment agreement between Mekkya and the Company which the directors of the Company deny signing: the Liquidator had not investigated this issue;

(2) the terms of the investment agreement provide for Mekkya to make contributions to the Company of $750,000 ($300,000 in services and $450,000 in capital) in return for receiving $975,000 on the date of completion of the development of the North Melbourne property or no later than 28 February 2016; and

(3) the Liquidator’s investigations verified capital contributions of only $72,929.52 by Mekkya and did not allow the Liquidator to determine the value of services provided.

As a result, the Liquidator based his conclusion that Mekkya was entitled to the sum of $1,004,016.76 upon the default judgment against the Company in the County Court dated 15 May 2018. The original default judgment was for amount of $975,000 together with interest to the date of judgment of $4,808.22 and costs of $3,040, totalling $982,848.22. I note that the plaintiffs seek in due course to have the default judgment set aside.

As to the Sacca debt, the Liquidator’s Report records that:

(1) Sacca advanced $1.9 million to the Company at the request of the directors (with no written agreement) which was used to reduce the first mortgage debt then due to EBISU Finance Partners;

(2) when the money was not repaid on demand, four undated Investment Loan Agreements were entered into between Sacca and the Company supported by incomplete ‘off the plan’ sale contracts for four units in the North Melbourne development;

(3) following the failure to complete the development, Sacca sought to recover his investment and assigned those rights to MAG; and

(4) the rights of Sacca are not secured but the Sacca debt was due and payable. It was repaid from the sale proceeds.

As noted in the table above, Mekkya claimed a further debt of $1,560,000 was owed to him by the Company (the ‘second Mekkya debt’). However, the Liquidator concluded that he had only been able to verify $290,000 in respect of the second Mekkya debt.

Sale proceeds and security

Further, the Liquidator concluded that the only debt properly secured over the assets of the Company was the Balanced Securities loan. The Liquidator calculated that MAG was entitled to receive the sum of $3,249,774.30, being the then-outstanding amount of the Balanced Securities loan, from the sale proceeds and that MAG was not entitled to receive the balance of the sale proceeds. As a consequence, the Liquidator has formed the view that the sum of $1,203,957.79, being the balance of the sale proceeds, should have been remitted to the Company on that date.

The Liquidator was not satisfied that the Franek loan was validly assigned to MAG. In addition, he noted that the Franek debt was not secured by a mortgage over the North Melbourne property. Further, the Liquidator concluded that the original Franek loan provided for annualised interest of 144%. He also concluded that the subsequent agreements which acknowledged a debt of $311,000, with an annualised interest rate of 100%, were ‘probably not enforceable against the company for reasons, amongst others, that they are uncertain and also probably unconscionable’.[22] Further, he concluded that the interest rates provided for in the original loan agreement and the subsequent agreements were usurious. As a result, the Liquidator did not consider that the proof of debt lodged by MAG in respect of the Franek loan, including enforcement costs in the sum of $1,375,000, was a true liability of the Company and/or secured by the North Melbourne property.
[22]Liquidator’s Report [138].

As a consequence, he concluded that $265,142.98 of the $371,055.52 of enforcement costs paid from the sale proceeds which related to the enforcement of the Franek loan was not a debt of the Company and should not have been paid from the sale proceeds. The Liquidator also took issue with the quantum of these enforcement costs.

THE PLAINTIFFS’ PROPOSAL

Before considering the submissions of the parties in detail, it is appropriate to consider the evidence relied upon in support of the plaintiffs’ proposal. This is because the MAG parties submitted that the plaintiffs’ evidence did not allow the Court to conclude that finance was available or that the mortgage over the North Melbourne property could be redeemed for the development to take place.

It is acknowledged by all the parties that the development was approximately 25% complete when work ceased in early 2018. Further, there is evidence in the affidavit of Mekkya sworn 2 April 2020 in support of AAGG’s application to discharge the restraining orders made on 7 August 2018 that the state of the development has deteriorated since that time. I will address this further in this section.

The plaintiffs’ proposal was based upon:

(1) borrowing funds of $11 million;

(2) using those funds to meet the debts of the Company that were due and payable, including those necessary to redeem the security over the North Melbourne property (i.e. $5,171,000), to complete the construction of the North Melbourne development (estimated at $3.2 million) and pay necessary deposits;

(3) the sale of the completed North Melbourne development for approximately $15.5 million; and

(4) the payment of all outstanding creditors of the Company, including the lender of the $11 million proposed to be borrowed, with an anticipated profit of approximately $2.5 million.

The plaintiffs prepared a budget in support of their proposal. It is exhibited to the affidavits of Wael and Hassan El Saafin, each sworn 17 September 2019. I will address it in due course. Before doing so, it is necessary to address the evidence in respect of some key aspects of the plaintiffs’ proposal.

Loan funds

On the termination application and initially in the inherent jurisdiction application, the plaintiffs relied upon an offer from Black Arrow dated 20 June 2019 to 65 Arden to lend $9 million (the ‘Black Arrow offer’) and an offer from Dr Atalla to lend $2 million (the ‘Atalla offer’). However, Black Arrow was deregistered by the Australian Securities and Investments Commission (‘ASIC’) on 29 March 2020.

As a consequence, at the hearing of this application, in addition to the Atalla offer, the plaintiffs relied upon an offer to 65 Arden from Private Mortgage Factory Pty Ltd (‘PMF’) dated 12 May 2020 to advance $9 million (the ‘PMF offer’). I will deal with the PMF and Atalla offers in turn.

Before turning to them, I note that the MAG parties placed great reliance upon the various offers for finance relied upon by the plaintiffs from time to time in this proceeding. They submitted in substance that while the plaintiffs had sought to rely on no less than 11 offers of finance, the plaintiffs have not been able to procure funds to pay the debts of the Company. As noted above, I dealt with the relevant offers then made in Reasons No 2. I am conscious of the previous offers that the plaintiffs have relied upon. However, in my view, I must consider the terms of the offers made and the persons or entities which now make them in order to assess the plaintiffs’ proposal.

As to the $9 million offer, it appears that both Black Arrow and PMF are controlled by or associated with a Mr Keith Blackney. He signed both the Black Arrow offer and the PMF offer. The address and contact details of Black Arrow and PMF are the same on both offers. Further on about 6 April 2020, Mr Blackney advised the solicitor for Franek and MAG in response to a request for documents relating to the Black Arrow offer that ‘… we/I do not trade under the name Black Arrow Mortgages. The new name is THE PRIVATE MORTGAGE FACTOURY [sic] PTY LTD under the new name I still have the funds available and will issue a new letter of offer when the time comes’.

In addition, the terms of the Black Arrow offer and the PMF offer are virtually identical. Indeed, the introductory words of the PMF offer provides that PMF has agreed to provide an unconditional loan approval on the same terms as Black Arrow. The only difference is the period of time that each offer was open. As a result, I will address the terms of the PMF offer.

First, it is dated 22 April 2020. It was open for acceptance until Wednesday, 6 May 2020. Second, the borrower is 65 Arden. Third, the loan advance is ‘$9,000,000.00 (Nine Million Dollars) To 66% LVR only of value’. Fourth, the interest rate is 11% per year within 18% default rate. Fifth, the principal is payable within 18 months from drawdown. Sixth, security is a registered first mortgage over the North Melbourne property with guarantors being 65 Arden, the Company (which is acknowledged to be in liquidation), Wael El Saafin and ‘any other directors’ (which I assume means directors of 65 Arden).

Seventh, the offer is subject to a number of conditions. Among others, the offer is said to be ’subject to adjudication or other resolution of Supreme Court proceedings in favour of you’. It is also subject to settlement of the advance taking place within 58 to 62 days. Of course, this proceeding is unlikely to be adjudicated within that time. Further, the PMF offer states:

You will through Saafin Constructions Pty Ltd (Subject to adjudication or other resolution of the Supreme Court proceedings wherein the property is returned to the company) at settlement grant an equitable interest in the property to [PMF]. Further, you will hereby charge as beneficial owner in favour of [PMF] all of the right title and interest in, or derived in, or derived from, your security property (noted on page 1) for the amount of your indebtedness to [PMF] from time to time.

The only property referred to in the PMF offer is the North Melbourne property.

I note that Wael El Saafin, who is the sole director and shareholder of 65 Arden, deposed in his affidavit sworn 17 September 2019 that upon termination of the Company’s liquidation, he was prepared to advance money to be borrowed by 65 Arden (then offered by Black Arrow and Dr Attala) to the Company in order to pay creditors and complete the development of the North Melbourne property.

The MAG parties disputed that Black Arrow or PMF had sufficient funds to advance $9 million to 65 Arden. They submitted this had not been verified on the material before the Court. They issued subpoenas to Black Arrow dated 24 September 2019 and 16 March 2020. Those subpoenas sought in substance documents showing the existence of funds available to make the ’Proposed Loan’ (as that term was defined in the subpoenas) and documents evidencing communications with any third party lenders in relation to the Proposed Loan.

Counsel for Franek and MAG referred to statements of Mr Blackney in response to a subpoena to Black Arrow to produce documents that he was ‘an introducer for lenders, it is not my funds’. Counsel for AAGG referred to the affidavit of Mekkya sworn 8 May 2020 which exhibited:

(1) an email from Mr Blackney producing documents in response to the subpoena dated 16 March 2020 which stated among other things that under PMF ‘I still have the funds available and will issue a new letter of offer when the time comes’; and

(2) an email exchange on 6 April 2020 in which Mr Blackney replied that the Proposed Loan to 65 Arden would be provided by ‘one of my investors’ but that, in accordance with normal practice, he would not name the investor.

In my view, it was not inappropriate for Mr Blackney to keep confidential the name of his investors. However, I am far from satisfied, on the evidence before me on this application, of the ability of PMF to advance the sum of $9 million to 65 Arden. This was certainly not deposed to in the affidavit material relied upon by the plaintiffs nor clearly established by the documents which were produced in relation to the subpoenas and drawn to my attention.

Regardless, based on the PMF offer, it seems that the advance cannot be made without the approval of the Liquidator. This is because it is a term of the PMF offer that PMF obtains a first registered mortgage over the North Melbourne property. That can only occur if the proceeding is successful and if the Liquidator consents to such a mortgage being granted. Further, it is a term of the PMF offer that the Company will grant an equitable interest in the property to PMF. Once again, that can only occur if the proceeding is successful and if the Liquidator consents. These terms are quite apart from the terms of the PMF offer which on the current evidence seem very unlikely to be met, namely the ‘66% LVR’ for the $9 million advance and the time conditions.

As to the Attala offer, it was originally made on 10 November 2018 (when the Company was in administration) to Wael El Saafin (care of the Company) to advance $2 million as an additional investment in the North Melbourne development. It was expressly made on the basis that Dr Atalla did not believe that the Company was insolvent and that the completion of the North Melbourne development would be in the best interests of all creditors. Dr Attala restated this offer on 5 February 2019 after the Company had been placed into liquidation. The offer was confirmed by an email to the solicitors for the plaintiffs dated 13 September 2019. The Attala offer is not subject to any conditions. It is not subject to the provision of any security. It does not provide interest to be paid.

The MAG parties issued a subpoena to Dr Attala seeking to establish whether he had funds available to make this advance. Those documents demonstrate that Dr Attala and Ms Abdelbaki (whom I assume to be his wife) have sufficient funds, either by way of money in hand or finance to advance these funds. In addition, they have equity in four properties in and around Melbourne.

The value of the North Melbourne development

As to the potential value of the North Melbourne development, the plaintiffs relied upon a price list setting out estimated sales prices of the units and the commercial spaces to be built on the North Melbourne property prepared by Mr Alex Puglia, a licensed real estate agent, in April 2018. I referred to this at [88] of Reasons No 2. The price list totalled $15,566,000. In his affidavit sworn 17 September 2019, Wael El Saafin deposed that in August 2019 Mr Puglia confirmed that prices in this list remained current prices. I note that the plaintiffs previously relied upon the valuation of Chris Rann of AdVal prepared for the MAG parties, which valued the North Melbourne property ‘as if developed’ at $13,813,000.

I note that the MAG parties relied upon valuations on an ‘as is’ basis obtained between June and September 2018 (including by Mr Rann) of $3.6 million, $4.2 million and $4.4 million respectively.[23]
[23]See Reasons No 2 (n 3) [79].

Construction Costs

As to the construction costs required to complete the North Melbourne development, the plaintiffs relied upon a construction progress payment from Napier & Blakely dated 28 March 2018. Those costs were $3.2 million. I referred to this in [89] of Reasons No 2. In his affidavit sworn 17 September 2019, Hassan El Saafin confirmed this estimate. He has been a qualified builder for almost 20 years and responsible for managing and carrying out building work for domestic and commercial buildings. He is currently a building practitioner registered with the Victorian Building Authority.

Hassan El Saafin deposed that based on his knowledge of the development of the North Melbourne property and his experience as a builder, he estimated that it would take approximately seven months to complete the development, including rectifying defects. Of the total costs of completion of $3.2 million, he estimated $350,000–$400,000 represented rectification works. These costs did not include any builder’s margin to complete the North Melbourne development.

In his affidavit sworn 2 April 2020, Mekkya deposed that:

(1) the North Melbourne development has been halted since April 2018;

(2) extensive remedial works will need to be undertaken given the exposure of the structure to the elements;

(3) he estimated costs of removal and demolition of $170,000 and of remedial works in the order of $570,000;

(4) he has been unable to obtain insurance for the North Melbourne property or improvements including public liability insurance; and

(5) on 20 February 2020, Building Point Building Consultants issued a building notice stating that the building work on the building is a danger to life, safety or health of any member of the public or any person using the building or the property.

I note that neither of the plaintiffs have been given access to the North Melbourne property by the MAG parties to update their estimates.

The budget

Further, both Hassan and Wael El Saafin produced a budget for the completion of the North Melbourne property. The budget forecasts a profit of $2,436,530. The budget proceeded on the assumption that:

(1) finance of $11 million was obtained;

(2) the debts that would be repaid total $5,171,000 (being the outstanding amount of the Balanced Securities loan of $2,960,000, the principal of the Franek loan of $311,000 and the Sacca debt of $1,900,000);

(3) each of the Mekkya debt, the Builder debt and the New Concept Design debt (which are disputed in this proceeding) would not be repaid;

(4) the balance of the finance would be applied to meet construction costs and deposits held in trust for seven contracts of sale in respect of the North Melbourne development; and

(5) the units in the development would be sold for $15,566,000.

As a result, the budget calculates there would be $17,879,500 available at the completion of the development which would be used to meet the following debts:

(1) Black Arrow/PMF of $9,000,000 plus $660,000 interest;

(2) Dr Atalla of $2,000,000;

(3) Trustworthy Nominees of $390,000;

(4) friendly creditors totalling $1,464,500; and

(5) shareholders totalling $1,929,466.

I note in passing that the debts due to ‘friendly creditors’ and to ‘shareholders’ were not identified in the budget or in oral argument in the inherent jurisdiction application. However, as to the debts due to ‘friendly creditors’, I refer to my comments in [39], [40] and [60] above. As to the debts due to ‘shareholders’ in their affidavits of 17 September 2019, each of Wael and Hassan El Saafin deposed that each of them and Mohamed El Saafin would be prepared to ‘subordinate’ their loans to the Company so that they would not demand repayment until the completion of the development.

There are some observations to be made about this budget. First, it is difficult to reconcile with the Creditors List. For the most part, it proceeds on the basis that the debts disputed in the PASOC are not due and payable save for the Sacca debt. That was not explained to me in argument.

Second, it proceeds on the basis that the loan funds of $9 million will be advanced. I refer to my comments in [94] and [95] above. Third, it proceeds on the assumption that the North Melbourne development will be completed on time and budget, and will obtain the sales per the April 2018 estimate. There are significant uncertainties about both of these assumptions.

THE PASOC

It is worthwhile to recall the claims in the PASOC which the plaintiffs now seek to pursue. As noted above, the plaintiffs challenge that each of the 20 June debts (including the Sacca debt) was due and payable as at 20 July 2018 or secured. Further, they allege that each of the Builder debt and the New Concept Homes debt was subject to a counterclaim or set-off for incomplete and defective work and, in the case of the Builder debt, liquidated damages.

In addition to the declarations referred to above, the PASOC includes the following money claims:

(1) a claim for damages for trespass as alleged in [16]–[21] of the PASOC against the Receivers and/or Franek for the period 9 April to 7 May 2018 while the Receivers were in possession of the North Melbourne property pursuant to the appointment by Franek on 9 April 2018 which appointment was withdrawn;

(2) 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 loan in late July 2018 as alleged in [22]–[36] and [64]–[65] of the PASOC (which would have led to a release of the securities and which has precluded the plaintiffs from developing the North Melbourne property);

(3) a claim for damages for trespass by AAGG as purchaser from 23 July 2018 as alleged in [43]–[45] of the PASOC which has precluded the plaintiffs from developing the North Melbourne property; and

(4) claims for damages and for account against MAG and AAGG for breach of duty by MAG (including breach of s 420A of the Act and under s 77 of the Transfer of Land Act 1958 (Vic) and knowing involvement by AAGG as alleged in [37]–[68] of the PASOC which has precluded the plaintiffs from developing the North Melbourne property.

THE SUBMISSIONS

All the parties, save for AAGG, were generally in agreement that the principles to be applied were those set out at [167]–[169] of Reasons No 2 which I will address further below. In summary, the Court has a discretion as to whether to grant leave depending on all the relevant facts but with regard to three principal but not exhaustive factors, namely:

(1) whether the claims made have a solid foundation;

(2) the attitude of the liquidator to the proposed proceeding; and

(3) practical considerations, with particular reference to the protection of the liquidator and company assets.

The plaintiffs’ submissions

The plaintiffs submitted that leave should be granted given:

(1) the claims made in the proceeding are strong in nature;

(2) serious issues are raised by the conduct of the MAG parties;

(3) the inability of the Liquidator of the Company to fund the prosecution of this proceeding;

(4) the Liquidator did not oppose leave being granted;

(5) the Liquidator’s view that the proceeding had a good claim for damages of at least $1.2 million; and

(6) the plaintiffs’ willingness to indemnify the Liquidator so that he is not exposed to personal liability.

As to any concerns about solvency of the Company, the plaintiffs contended any such insolvency was brought about by the claims which are the subject of this proceeding and may be remedied when the proceeding is determined in the plaintiffs’ favour. In any event, they referred to the plaintiffs’ proposal which would allow all due and payable debts of the Company to be met and the completion of the North Melbourne development.

The Liquidator’s submissions

As noted above, the Liquidator did not oppose leave being granted. In oral argument, counsel for the Liquidator confirmed receipt of all outstanding payments from the plaintiffs for the Liquidator’s costs. He requested that, as any condition of leave, funds be paid into trust to meet any future costs in monitoring the proceeding. These funds were deposited into the trust account of the solicitors for the plaintiffs in the course of argument.

As to the proposed funding asserted by the plaintiffs, counsel for the Liquidator referred to the PMF offer. He noted that it was a condition of the offer that the Company give a guarantee of the advance of $9 million. The PMF offer was also subject to the Company at settlement granting an equitable mortgage to PMF. Counsel informed the Court that he was instructed that the Liquidator could not give this guarantee or agree to meet this condition at this time. This was because such decisions depended upon the actual outcome of the proceeding, any relief ordered and the assets and liabilities of the Company determined at that time.

The Liquidator was of the view that it was far too early to tell whether the proceeding would produce the pool of funds necessary to pay out all of the creditors of the Company. In this regard, counsel for the Liquidator referred to the revised annexure 4 to the Liquidator’s Report which indicated that the Company was insolvent to the extent of approximately $4 million.

Counsel for the Liquidator noted that the plaintiffs’ proposal proceeded on the basis that the Liquidator would transfer the North Melbourne property to the plaintiffs or a company associated with the plaintiffs in the event that the proceedings were successful. That was a decision for the Liquidator. Counsel for the Liquidator advised that the Liquidator’s current inclination is that, should the property be re-transferred to the Company, the Liquidator would sell the property and realise money for creditors. No doubt that would be for the best possible price he could then obtain. Counsel for the Liquidator confirmed that the Liquidator would not be undertaking the completion of the development of the North Melbourne property.

However, counsel for the Liquidator conceded that, if the sale is set aside and if all creditors are paid, he was likely to agree to an order that the liquidation be terminated. However, that situation was far from certain in light of the issues in the proceeding and the proposed funding arrangements of the plaintiffs.

The MAG parties’ submissions

Franek and MAG acknowledged that the plaintiffs’ claims were not oppressive or vexatious and that they raise serious questions to the tried. This was consistent with their earlier concession on the hearing of the restraining order. However, they submitted any re-transfer of the land would be subject to whatever security interest existed before the transfer in favour of MAG or AAGG. I will deal with this further below.

They submitted that the plaintiffs had not offered to fund the Liquidator to prosecute the proceeding. They submitted this was the usual course and consistent with the decision of Connock J in Re ACN 091 518 302 Pty Ltd (in liq) (formerly Pinnacle Investments Pty Ltd)[24] (‘Pinnacle’).[25] They submitted that in this case the Liquidator’s position was that he considered it would be advisable if he were funded to conduct examinations prior to instituting a proceeding.[26]
[24][2019] VSC 699 (‘Pinnacle’).
[25]Pinnacle (n 24) [151]–[153].
[26]Transcript of Proceedings, El-Saafin & Anor v Franek & Ors (Supreme Court of Victoria, S CI 2018 01685, Lyons J, 14 May 2020) (‘Transcript’) 85:23–6.

[13]… In my view, that was a misconception of what his Honour had said. What he said was that the ordinary rule is that in an ordinary case the court should not entertain a derivative action where the company is in liquidation. That does not mean that in extraordinary cases leave might not properly given under s 237.

…
[15]… It ought to be only in an extraordinary case where the court will consider permitting the liquidator’s role to be supplanted in the pursuit of litigation on behalf of the company.[50]

[50]Freshstart (n 42) [13], [15].

There are a number of observations to make about Whelan J’s comments. First, they were made at a time when s 237 of the Act was thought to apply to companies in liquidation. That is not the current law. Second, they were not made in the context of the Court’s inherent jurisdiction, but an application under s 237 of the Act. I note in passing that there does not appear to be any general discretion under s 237 of the Act if the matters set out therein are established.

Third, if by the expression ‘extraordinary case’ Whelan J meant ‘a case which is out of the ordinary’ or where there exist ‘special circumstances’, I have no issue with his Honour’s expression if it were to apply to the Court’s inherent jurisdiction. However, if by this expression Whelan J intended that it is only in exceptional circumstances that the Court would exercise its inherent jurisdiction to grant leave to another to pursue proceedings on behalf of a company in liquidation, I can see no basis in the comments of Gummow J (or indeed the other authorities considered above) to conclude that it is only in such circumstances that leave would be granted.

Malhotra concerned an appeal against a decision of a trial judge to dismiss an application primarily to terminate a liquidation. Amongst a suite of relief, the applicant had sought leave to commence a derivative action under s 237 of the Act. However, that application was far from central to the issues determined by the trial judge or on appeal. In this regard, I refer to the detailed analysis of the case by Connock J in Pentridge Village Pty Ltd (in liq) v Capital Finance Australia Ltd.[51] With respect, I agree with his Honour’s analysis that the Court of Appeal only dealt with the derivative leave application in short compass and ‘for completeness’.
[51](2018) 58 VR 1 (‘Pentridge’) [300]–[310] in which his Honour noted that the application for leave to commence a derivative action was one of about 23 various forms of relief sought by the plaintiff and was only addressed in one short paragraph of the 284 paragraphs of the reasons of the trial judge.

The Court of Appeal concluded that the trial judge was correct in not granting leave. This is in circumstances where new liquidators were going to be appointed who would consider the potential claims many of which had already been assessed by the then current liquidators as having some validity or strength. The Court went on to state:[52]
[52]Malhotra (n 43) [77]–[78].

77In any event, ordinarily, it is inappropriate to allow derivative proceedings to be brought when a company is in liquidation because it would require the court to permit another to supplant the liquidator as the personification of the company for that purpose.⁹ And as Gummow J said in Scarel Pty Ltd v City Loan & Credit Pty Ltd:¹⁰
“The ordinary rule is that the liquidator, in the ordinary case, is the appropriate person in whom is vested the authority to decide whether the company should take or continue action to recover damages or secure other relief for an injury done to the company.⁹ In my view, this follows from the operation of the provisions of the Code to which I have referred. ... [T]he general proposition is that with the liquidation, both the directors and shareholders in general meeting cease to have authority to institute or continue litigation by the company.”

78We are not satisfied that it is probable that the liquidators will not bring such proceedings against the relevant respondents as may be warranted, assuming sufficient funds are available to adopt that course. Overall, we consider that it is in the best interests of the company that, as his Honour concluded, the matter be left with the liquidators. …

__________________________
⁹See, for example, Freshstart Australia Pty Ltd v Lofthouse [2006] VSC 317 at [15], per Whelan J.

¹⁰ (1998) 17 FCR 344 at 350.

I do not consider these comments of the Court of Appeal, in particular the reference to [15] of Freshstart in the footnote set out above, to mean that the Court was concluding that leave will only be granted to pursue a derivative claim on behalf of a company in liquidation only in exceptional or extraordinary circumstances. That is not consistent with the language or, in in my view, the intent of the Court of Appeal. Rather, these observations of the Court of Appeal reflect that, ordinarily, it is a function of the liquidator to prosecute proceedings in the name of the company.

Further, it is significant that no such extraordinary or exceptional circumstances requirement has been imposed by other courts of different jurisdictions within Australia as referred to above when considering the inherent jurisdiction of the Court to grant leave.

However, for completeness, I note that Brereton J in Re Featherstone Resources Ltd[53] considered that while the jurisdiction of a court permits a beneficiary to sue on behalf of a trust and the exception to the rule in Foss v Harbottle required ‘exceptional circumstances’, the inherent jurisdiction to grant leave in respect of a company in liquidation was analogous to, but distinct from, those jurisdictions in that leave is required in the context of a company in liquidation.
[53](2014) 101 ACSR 394 [43].

As a result, I remain of the view that the relevant principles are as set out in [144] above.

I will now briefly address the principal factors identified in Carpenter. As to the first factor, Barrett J in Carpenter expressed the view[54] that the requirement that a claim had a ‘solid foundation’ involved ‘as a practical matter, that there are reasonable prospects of success and some tangible benefit is genuinely in prospect’. Black J adopted this passage with apparent approval in Sundara.[55] I note that this formulation is in contrast to s 237(2)(c) of the Act which requires the Court to be satisfied that the proposed derivative action is in the best interests of the company.[56]
[54]Carpenter (n 34) [30].
[55]Sundara (n 39) [10] quoting Carpenter (n 34) [30].
[56]Corporations Act 2001 (Cth) s 237(2)(c).

Further, there is no requirement that the Court should base its decision solely on a draft pleading. Rather, the Court must consider whether the cause of action asserted in the pleading and other evidence before the Court relied upon on the application demonstrate some solid foundation.[57]
[57]Cadima (n 35) [45]; Carpenter (n 34) [29].

As to the second factor, I consider that the attitude of the liquidator and the basis of that attitude is of great importance to the determination of such applications. This is consistent with the view of Barrett J in Carpenter, who noted that the liquidator’s view as to whether a proceeding should be initiated by a company will be an ‘important consideration’ where the Court is asked to sanction a course by which a creditor or contributory is given carriage of the proceeding on behalf of the company. Barrett J quoted with approval the following passage from the judgment of Cole J in Partnership Pacific Ltd vAliprandi:[58]

If the liquidator were of the view that the action was soundly based but that because of absence of funds he was unable to prosecute it, one can understand a court exercising a discretion to grant a contributory the right to sue in the company's name (whether pursuant to the statute, or under some inherent jurisdiction).[59]

[58]Partnership Pacific Ltd vAliprandi (1990) 4 ACSR 51, 54 (‘Pacific Partnership’) (Cole J).

[59]Partnership Pacific (n 58) quoted in Carpenter (n 34) [31].

As to the third factor, it appears that the real concern relates to the protection of the company and the liquidator, including by way of security, if there are doubts about the financial capacity of the applicant to provide that protection.

As noted above, Austin J in Cadima referred to the possibility that the Court may require that the person who conducts the litigation give an indemnity supported by security for costs to protect the other party to the litigation. He noted that an applicant typically:

… offers to indemnify the company in liquidation and the liquidator in respect of the proceedings, and to conduct the proceedings in such a fashion that liability to pay costs is undertaken by the applicant rather than the company to the extent that it is possible to do so. The Court will wish to be satisfied that the assets of the company in liquidation are not put at risk by the proceedings and that the liquidator is not exposed to personal liability without proper protection, and may also properly have regard to the risks which the litigation poses for the other party, given that the plaintiff is a company in liquidation, the assets of which are to be protected. To these ends, the Court may require that the person who conducts the litigation gives an indemnity supported by security for the benefit of the company and the liquidator, and perhaps also security for costs to protect the other party to the litigation.[60]

[60]Cadima (n 35) [49].

Barrett J in Carpenter, referred with approval to this passage.[61] However when formulating the principal factors, Barrett J concluded that the third principal factor was 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’.[62] I note that no such security for the costs of the opposing party was ordered in Cadima or Carpenter.
[61]Carpenter (n 34) [32].
[62]Carpenter (n 34) [34].

So too in Toongabbie Collision Pty Ltd (in liq) v CGU Insurance Ltd,[63] Hidden J declined to order security for costs as a condition of leave on the basis that it remained open for the defendants to make such an application.[64] Further, in Re Staway Pty Ltd (in liq) (recs and mgr apptd),[65] Black J stated that security for costs was not relevant to the grant of leave.[66] He also noted that the evidence in support of the claim for security was far from adequate.[67] Further, he noted the complexity in the application for security for costs which had not been addressed in the evidence or argument.[68]
[63][2013] NSWSC 1409 (‘Toongabbie’).
[64]Toongabbie (n 63) [24].
[65][2013] NSWSC 819 (‘Re Staway’).
[66]Re Staway (n 65) [58].
[67]Re Staway (n 65) [59].
[68]Re Staway (n 65) [60].

As noted above, in this case, Franek and MAG relied, by analogy, on Fiduciary. In that case, the plaintiffs included two companies and an individual, Mr Rich, who controlled them. Claims were brought alleging damage to the plaintiffs and the first defendant (‘MDU’), a company also formed by the Rich interests and of which the first plaintiff was a shareholder. Orders for security for costs had been made against the plaintiffs in the proceeding which had not been met.

Mr Rich then sought to bring a derivative claim on behalf of MDU based on the same cause of action pleaded by the plaintiffs under s 237 of the Act. Austin J granted leave. In light of the existing orders for security for costs (and by reason of which the plaintiffs’ proceeding was then stayed), Austin J considered that the existing orders for security for costs should be extended to the claims to be brought by Mr Rich against MDU. He thus decided to make it a term of granting leave.[69]
[69]Fiduciary (n 27) [53].

The facts in Fiduciary are very different from this case, there being no existing order for security for costs or stay of the existing proceeding for the non-payment of such security. Further, the orders in Fiduciary were not made under the inherent jurisdiction of the Court.

As to the other relevant circumstances in this case, I note that Fraser J in BDO considered that circumstances relevant to the application before him included:

(1) the fact that the applicant was disqualified from being involved in the management of the company; and there was no evidence that any appropriately qualified person would accept appointment to do so;

(2) the solvency of the company;

(3) evidence of the attitude of persons, beyond the liquidator, who had an interest in the proposed litigation; and

(4) the efficiency with which the proposed litigation would be conducted.

ANALYSIS

Consistent with Reasons No 2, I have concluded that the plaintiffs in their capacity as shareholders have standing to seek the exercise of the Court’s inherent jurisdiction. I will now consider the circumstances relevant to the exercise of the Court’s discretion in this case.

Claims with solid foundation

The first principal factor identified in Carpenter is whether the proceeding proposed to be pursued has some solid foundation in that the claims exhibit some degree of merit as to be neither vexatious nor oppressive and present reasonable prospects of success.

In my view, and as conceded by counsel for Franek and MAG, the proposed claims all have a solid foundation, are neither vexatious nor oppressive and present reasonable prospects of success. Indeed, I have expressed the view that some of the claims have strong prospects of success. I refer to my comments in [19], [20], [31] and [32] above. I am also of the view that there is a solid claim that each of the 20 June debts are not due and payable or are subject to a counterclaim or set off in accordance with the PASOC.

For the most part, this accords with the conclusions reached by the Liquidator. There are two exceptions: the Mekkya debt and the Sacca debt. As to the Mekkya debt, there appears to be issues regarding the signing of the agreement (which was not investigated by the liquidator) and the amount advanced pursuant to the agreement, notwithstanding the default judgment. I refer to [73] above. As to the Sacca debt, I note that the plaintiffs dispute the Sacca debt in the PASOC but appear to acknowledge an obligation to pay it in the budget. This was not explained to me in the course of argument. However, the Liquidator has concluded that the Sacca debt was not secured and thus was improperly paid from the sale proceeds. In these circumstances, I consider there is a solid basis for the claims in respect of the Mekkya debt and the Sacca debt.

I have considered the submissions of AAGG that my conclusions about the claims relating to the sale of the North Melbourne property to AAGG need to be reconsidered, in particular in light of the evidence of the valuation of the North Melbourne property at about the time of its sale by MAG to AAGG. As I set out above, the circumstances in which that sale occurred (including in which the 20 June debts were assigned) raise serious issues about the conduct of Franek, MAG, Mekkya and Sacca. This is in circumstances where the Plan was not disputed by the MAG parties.

In the PASOC, the plaintiffs raise allegations in respect of that conduct, including that the transfer was made in bad faith. While I accept that the value of the property at the time it was sold may be relevant to those allegations, I do not accept it is determinative of them. The obligation on a mortgagee to act in good faith is an obligation to act conscionably: the duty must be considered with regard to the whole of the mortgagee’s conduct.[70] As a result, the submissions of AAGG do not cause me to alter the views expressed in my previous Reasons. Indeed, on reviewing the matters again for the purpose of these reasons, these views have been confirmed.
[70]See, eg, MBF Investments Pty Ltd v Nolan (2011) 37 VR 116 [76], [100] (Neave, Redlich and Weinberg JJA).

Further, as noted above, the Liquidator considers that the Company has reasonable prospects of recovering damages of $1,203,957.79 from the MAG parties and the Receivers. As is evident from the Liquidator’s Report, this is based upon the fact that the Liquidator’s investigations to date have revealed that only the Balanced Securities loan was due, payable and secured at the time the sale proceeds were applied to the MAG parties and, in particular, that the Franek debt was not due, payable or secured at that time. In my view, this is a claim which now relates to the claims now made by the plaintiffs in the proceeding and should be pursued.

Further, as set out in [78] above, the Liquidator has formed the view that the Franek loan is probably not enforceable and was not satisfied that it was validly assigned to MAG or secured. The reasons he has given provide a solid basis for his conclusion that it is not a true liability of the Company. As noted above, the MAG parties submitted that it would be opportunistic and disingenuous for the plaintiffs to now assert that the Franek loan is not enforceable by MAG and/or secured. I disagree. It is important to bear in mind that, if leave is granted, it is leave for the proceeding to be pursued on behalf of the Company, not on behalf of the plaintiffs. As the Liquidator has identified this claim as having reasonable prospects of success and it relates to the claims made by the plaintiffs in the PASOC, I consider it is appropriate that it be pursued on behalf of the Company.

I will address the likely tangible benefits as a result of this proceeding in due course.

The attitude of the Liquidator

The second principal factor is the attitude of the Liquidator. This is not a case where the Liquidator has received detailed legal advice of the claims which are the subject of the application for leave and has decided not to pursue them based on such advice. Rather, due to the financial position of the Company, the Liquidator is without funds and thus has been unable to obtain detailed legal advice regarding the Company’s claims in respect of which leave is sought.

In these circumstances, the Liquidator does not oppose leave being granted subject to all relevant costs being met. This is in circumstances where he has identified an additional claim for damages available to the Company of approximately $1.2 million.

As noted above, counsel for the MAG parties submitted that the Liquidator’s position was that he considered it advisable if he were funded to conduct public examinations prior to instituting a proceeding. As a result, he submitted that, rather than granting leave, the plaintiffs should offer to fund the Liquidator to prosecute a proceeding, consistent with Pinnacle.

In that case, the applicants sought to pursue certain claims in a writ filed in what were said to be urgent circumstances and under limited authority from the liquidator as a result of limitation of actions considerations raised with the liquidator by counsel for the plaintiff.[71] The Liquidator’s attitude was that he was willing to take steps to further explore the merits of the relevant claims and take advice on them if put in funds to do so by the applicants seeking leave. Indeed, this was one of the approaches initially raised with the liquidator in that case. In the circumstances of that case, Connock J refused to grant leave.
[71]Pinnacle (n24) [2] nn 2.

His Honour was not satisfied that the relevant claims had a solid foundation or reasonable prospects of success. Even assuming they did, his Honour said he would not have granted leave. He considered that leaving the decision of how best to proceed with the proceeding in the hands of the liquidator willing, if funded, subject to such advice and further protection, to prosecute the proceeding ‘[sat] comfortably with the observations that have been made in other cases regarding the appropriateness or desirability of leaving litigation in the hands of the liquidators including, for example, the observations made in Scarel, Cadima Express, Partnership Pacific, Chahwan, Fresh Start, and Malhotra’.[72] This was relevant to Connock J’s conclusion at [153] that the position of the liquidator on the facts of that case weighed against rather than in favour of the relief sought.
[72]Pinnacle (n 40) [152] (citations omitted).

Having reviewed his Honour’s reasons, I can see no statement of principle to the effect that leave should never be granted to another if a liquidator is not unwilling to pursue a proceeding, if funding were provided. Rather, these comments were made in the context of the particular facts of that case and that, ordinarily, it is a liquidator who decides whether to bring proceedings on behalf of a company in liquidation. I refer to my comments in [144] and [161] above in relation to the importance of the attitude of the liquidator. Further, I refer to the comments of McLelland J in Aliprandi on the procedure of granting leave to someone other than a liquidator:

The procedure has the disadvantage that the conduct of litigation in the name of the company is taken out of the control and supervision of an officer of the court. Nevertheless in the present case such a procedure would have advantages in that Mr Aliprandi would be a co-plaintiff and in practical terms the conduct of the litigation would be in the hands of solicitors engaged by him and at his expense and risk.[73]

I note that this passage was referred to with approval in Carpenter.[74]

[73]Aliprandi (n 30) 252.

[74]Carpenter (n 34) [31].

In any event, the facts in this case are different to those in Pinnacle. In this case, the Liquidator does not oppose leave being granted. He has not expressed any willingness, or preference in place of the plaintiffs, to further explore or pursue the claims in respect of which leave is sought. Rather, the Liquidator has indicated that, if the liquidation was financial, given the complexity of the issues involved, the Liquidator would likely review documents, conduct public examinations and take legal advice prior to commencing any proceedings.

The need for these further investigations arises from the lack of detailed knowledge of the Liquidator of the facts giving rise to the claims. This is in contrast to the position of the plaintiffs and their legal advisors who have first-hand knowledge of many of the relevant events and have been pursuing these and related claims to date. In the circumstances of this case, I consider it is likely to be more efficient and less costly for the plaintiffs to conduct the litigation to pursue the claims against the MAG parties on behalf of the Company in light of the history of this proceeding.

Practical considerations

The third principal factor relate to the practical considerations, in particular the protection of the Liquidator and the Company. It is of significance that the Liquidator does not assert any prejudice to the assets of the Company or the course of the liquidation should the proceeding be pursued by the plaintiffs. It would appear that this is because, in the Liquidator’s view, the only asset of the Company which might have been available for the benefit of all true creditors (i.e. the North Melbourne property or the sale proceeds) has been applied by the MAG parties to entities who were not entitled to those proceeds. I will comment on this further below.

The Liquidator only sought security for his costs associated with this proceeding. As noted above, the plaintiffs have now paid all amounts owing to the Liquidator in respect of his costs arising from this proceeding to date. Further, they have provided security for the estimated costs of the Liquidator in monitoring these proceedings in the event leave is granted.

As to the security for costs of the MAG parties if leave is granted, I am not satisfied that I should impose such a condition on the grant of leave. This is for a number of reasons. First, I do not read the comments of Austin J in Cadima as suggesting that security for the costs of the other party will ordinarily be relevant in deciding whether or on what terms to grant leave. This is because security for costs applications can involve complex questions of law and fact including the impecuniosity of the plaintiff, the reason for that impecuniosity and assessments of the quantum of security to be ordered. They ultimately involve the exercise of the discretion of the Court.

For my part, I am not convinced that these complex issues should be relevant to the determination of an application for leave to pursue a proceeding on behalf of a company in liquidation. This is because I consider the focus of the practical considerations for the Court should be those of relevance to the company and its liquidator. I accept that in an unusual case like Fiduciary an existing order for security may have some relevance. But I consider that such circumstances will be rare. Further, in the event that leave is granted, it is always open for the defendants to the proceeding to apply for security for costs which can then be determined in accordance with the usual principles.

Second, in the event that I am wrong and this issue is a relevant consideration, in particular to the issues as to whether the grant of leave would be futile because no such order for security for costs could be met, I am not satisfied that I can form a view about these matters on the material currently before me. I have no concept of the amount of security sought or whether or not the plaintiffs could provide security for such a sum. In these circumstances, it is not appropriate to impose any conditions in respect of any security for costs of the MAG parties upon any grant of leave.

Other relevant circumstances

It is then necessary to consider other relevant circumstances. The first relates to whether granting leave would be likely to produce a tangible benefit for the Company, relevantly the creditors of the Company, given its financial situation. Of course, the question of tangible benefit is linked to the first principal factor referred to above and the strength of the claims sought to be pursued.

The plaintiffs rely upon the plaintiffs’ proposal as a tangible benefit which would result if leave were granted. However, I am unable to conclude that this is so. First and foremost, the terms of the plaintiffs’ proposal are such that it is not possible to conclude that the proposal could be put into effect at this time or in the future. I refer to my comments at [94], [95] and [108] above. The primary reason is that the advance of $9 million depends upon the Liquidator’s consent to a mortgage over the North Melbourne property which he, sensibly, is not now willing to give.

However, in my view, granting leave would likely produce other tangible benefits. This is in the context that counsel for the plaintiffs undertook on behalf of the plaintiffs that any damages obtained in the proceeding would be paid to the Company.

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. I will address this further below.

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. I refer to my comments in [31], [32] and [195] above. For example, pursuant to the claims summarised in [31] and [32] above, 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.

Much of the argument of the MAG parties proceeded on the basis that all moneys claimed by them at all relevant times were due and payable. Indeed, the position of the MAG parties as at June 2018 was that the Company owed $8,259,990.83. The debts claimed to be owed and secured to the MAG parties constitutes in the order of 60-70% of all of the debts owed by the Company. As noted above, the Liquidator does not accept all amounts which are or have been claimed by the MAG parties to be due and payable by the Company and/or secured. Further, there has been and remains a dispute between the plaintiffs and the MAG parties as to the true extent of Company’s liability to the MAG parties and the extent to which such liabilities are secured.

For example, if the Liquidator is correct, the only secured debt was the Balanced Securities debt of approximately $3,250,000 as at the date the sale proceeds were applied by MAG. As a result, the balance of the sale proceeds should have been applied for the benefit of all of the creditors of the Company in the proper manner, not to pay the debts asserted to be owed to the MAG parties by them. In my view, the true determination of the MAG debts which were or are due and payable and whether those debts were secured is in the interests of the creditors of the Company as a whole.

As noted above, the MAG parties rely upon the plaintiffs’ apparent failure to comply with their obligations as directors of the Company, in particular to keep written financial records. I refer to the conclusions of the Liquidator in this regard referred to above. They submit this would be relevant to the determination of the termination application and, to the extent that is relevant to the plaintiffs’ proposal, it is relevant to this application. Consistent with the comments of Fraser JA in BDO, this conduct may have relevance to this application. However, while I have had regard to this conduct, in my view it is not a determinative factor in the exercise of my discretion. Further, I am conscious that the conclusions reached by the Liquidator have not been investigated or proven in this Court.

On the other hand, 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. In my view, this is also a relevant circumstance in the exercise of the Court’s discretion.

Based on all these factors, I am satisfied that the circumstances of this case are out of the ordinary and special. Further, if I am wrong and extraordinary or exceptional circumstances are required, based on all these circumstances, I am satisfied that that the circumstances of this case are extraordinary and exceptional.

As a result, I am of the opinion that the Court should exercise its discretion in favour of the plaintiffs to grant them leave to bring, on behalf of the Company:

(1) claims substantially in accordance with the PASOC, including the damages claim identified by the Liquidator referred to above and any claims for the recovery of sums received from the sale proceeds; and

(2) claims based substantially on the investigations of the Liquidator in relation to the Franek loan.

Such leave is granted on the basis of the undertaking of the plaintiffs by their counsel to pay to the Company any damages received in respect of these claims. Further, I consider that leave should be subject to certain conditions, namely that:

(1) the plaintiffs file an amended statement of claim with 21 days, joining any necessary parties and subject to all defendants having liberty to apply on proper grounds to strike out any parts of the amendments; and

(2) the plaintiffs pay into trust a further sum relating to the likely costs associated with the Liquidator assisting the plaintiffs in providing documents relevant to these claims and approving any settlement or compromise of the proceeding, such sum to be agreed within 21 days and failing agreement determined by the Court.

Further, I will grant the parties liberty to apply.

I will hear from the parties on the form of orders to be made to give effect to these reasons and on the question of costs of this application. The parties are requested to confer on the form of orders to be made to give effect to these reasons. In the absence of agreement, I will list the matter for further hearing.

Alleged Creditor	Amount Claimed	Amount accepted
1	MAG (Balanced Securities)	$2,826,690	0
2	MAG (Franek)	$1,375,000	0
3	Mekkya debt	$1,066,438	$1,004,017
4	Mekkya	$1,560,000	$290,000
5	Ali Abou-Eid	$50,000	0
6	Calliden Insurance	$200,000	$200,000
7	Evelyn Yelda	$150,000	$150,000
8	Hassan El Saafin	$222,466	$222,466
9	Helmy Ramahi	$20,000	$20,000
10	Mahmoud Hegazy	$540,000	$353,000
11	Mahmoud Ramahi	$354,000	$0
12	Mersal Nasser	$40,076	$0
13	Dr Atalla	$550,000	$342,000
14	Mohamad El Saafin	$950,000	$0
15	Muhamed Al Zubeidi	$306,001	$256,001
16	Omar Ibaida	$520,000	$300,000
17	Osam Bakhityar	$430,000	$281,000
18	Taxline group	$44,000	$43,987
19	Trustworthy Nominees	$470,000	$390,076
20	Wael El Saafin	$757,000	$50,000
$12,709,671	$3, 902,574

[2020] VSC 389

9 July 2020