Fazche Pty Ltd v Mounzer & Ors, Fazche Pty Ltd v Internal Lynx & Ors
[2020] SADC 99
•28 July 2020
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Interlocutory Application)
FAZCHE PTY LTD v MOUNZER & ORS, FAZCHE PTY LTD v INTERNAL LYNX & ORS
[2020] SADC 99
Decision of His Honour Judge O'Sullivan
28 July 2020
PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - SECURITY FOR COSTS
Application for security for costs in two actions.
The two proceedings (“Mounzer Proceedings” and “Internal Lynx Proceedings”) concern contracts for the construction of multiple dwellings and are brought against the owners of the land, as well as Hayssam Hamra, a consultant to Fazche Pty Ltd at the relevant times and Satori Projects Pty Ltd, a company of which Mr Hamra’s wife is the sole director and shareholder.
Fazche Pty Ltd alleges that the contracts for the construction of the dwellings were entered into by Mr Hamra on behalf of the applicant at sums lower than their value, thereby breaching his fiduciary duty. It is also alleged that payment owed to Fazche Pty Ltd under the contracts was diverted to Satori Projects Pty Ltd.
A third set of proceedings is brought by Fazche Pty Ltd concerning renovations done to Mr and Mrs Hamra’s house allegedly at its expense. It is further alleged that Mr Hamra misused the company’s bank accounts and fuel cards.
Fazche Pty Ltd opposes the applications on numerous grounds, including that Mr Hamra and Satori Projects Pty Ltd are the cause of its impecuniosity.
Held: application dismissed.
1. Where there is an allegation that the respondents’ conduct has contributed materially to or has caused the applicant’s impecuniosity, in the circumstances of this matter it is appropriate in considering whether to exercise the Court’s discretion to take into account facts and evidence external to the present proceedings, provided they are relevant to that question.
2. Although it is only at an interlocutory stage in the proceedings, and allegations have not been tested, there is compelling evidence to support the allegation that the conduct of Mr Hamra and Satori Projects Pty Ltd has contributed materially to or caused the impecuniosity of Fazche Pty Ltd.
3. Prosecuting the action, if successful, will be to the benefit of the creditors.
Corporations Act 2001 (Cth) s 1335; Companies (Queensland) Code s 533; Building Work Contractors Act 1995 (SA) s 30, referred to.
Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523; Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] 1 QB 609; John Arnold’s Surf Shop Pty Ltd (in liquidation) v Heller Factors Pty Ltd (1979) 22 SASR 20; Buckley v Bennell Design and Constructions Pty Ltd [1974] 1 ACLR 301; Concrete Mining Structures Pty Ltd v Cellcrete Australia Pty Ltd (No 2) [2016] FCA 360 ; House v The King (1936) 55 CLR 499; Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57; Melunu Pty Ltd v Claron Constructions Pty Ltd [2004] NSWSC 1064; KP Cable Investments Pty Ltd v Metaglow Pty Ltd (1995) 56 FCR 189; Haskins Contractors Pty Ltd (In liq) v Sydney Airport Corp Ltd [2002] NSWSC 267; JH Haymes ‘Security for Costs: Extent of Discretion’ (1976) 120 Sol J 479, considered.
FAZCHE PTY LTD v MOUNZER & ORS, FAZCHE PTY LTD v INTERNAL LYNX & ORS
[2020] SADC 99Introduction
By Interlocutory Applications dated 2 April 2020[1] the Fourth and Fifth Respondents in action 980 of 2019 and Second and Third Respondents in action 981 of 2019 (“Mr Hamra” and “Satori”, respectively) seek an order that the applicant (“Fazche”) provide security for the costs in the proceedings and that the proceedings be stayed pending provision of that security.
[1] FDN42 in action 980 of 2019 and FDN36 in action 981 of 2019.
The applicant opposes the application on the basis, that amongst other things, Mr Hamra and Satori are material contributors to or the cause of Fazche’s impecuniosity.
Background
These proceedings concern building work done by Fazche in the construction of multiple dwellings. The two sets of proceedings the subject of the applications are brought against the owners of the land on which the houses were built and against Mr Hamra and Satori. Mr Hamra is an undischarged bankrupt[2] who worked for Fazche as a consultant from 2011 to 2017 initially as a salesman, then in a semi-managerial role from 2016 to 2018.[3]
[2] Sixth Affidavit of Nicola Steven Fazzari sworn 28 April 2020 [17], Exhibit NSF5.
[3] First Affidavit of Nicola Steven Fazzari sworn 10 September 2019 [15]-[17].
Satori is a company of which Mr Hamra’s wife, Ms Noura El Hamra is the sole director and shareholder.[4]
[4] Second Affidavit of Nicola Steven Fazzari sworn 6 November 2019, filed 7 November 2019 [20], Exhibit NSF11.
Action 980 of 2019 (“Mounzer Proceedings”) concerns a contract entered into between Fazche and Sami and Leila Mounzer for the construction of a house at Salisbury Downs, South Australia.
Action 981 of 2019 (“Internal Lynx Proceedings”) concerns two contracts entered into between Fazche under its business name “Integrity New Homes” and Internal Lynx Pty Ltd for the construction of two houses, one at Hillbank and the other at Encounter Bay, South Australia.
It is alleged by Fazche in both proceedings that the contracts were entered into by Mr Hamra on behalf of Fazche at sums lower than their proper value and in so doing Mr Hamra breached his fiduciary duty to Fazche.
It is also alleged by Fazche that payment owed to Fazche under the Mounzer contract was diverted to Satori.
There is a third set of proceedings brought by Fazche against Mr and Mr Hamra, Satori and Lincoln Creek Pty Ltd (“Lincoln Creek Proceedings”),[5] which, amongst other things, concerns renovations done to Mr and Mrs Hamra’s house allegedly at Fazche’s expense but without reimbursement. It is further alleged in the Lincoln Creek proceedings that Mr Hamra misused bank accounts and fuel cards belonging to Fazche. Security for costs is not sought in relation to those proceedings.
[5] Action 43 of 2020.
On 18 December 2019, a Judge of this Court made an order for security in the sum of $25,000 against Fazche in favour of the then co-respondents in the Mounzer and Internal Lynx proceedings.
Documents
The respondents read and rely upon:
i.The Affidavit of David Matthew Elix sworn 29 November 2019 filed in the Internal Lynx proceedings;
ii.The Affidavit of Brenton Grant sworn 2 April 2020 filed in the Mounzer proceedings;
iii.The Affidavit of Brenton Grant sworn 2 April 2020 filed in the Internal Lynx proceedings;
iv.The Affidavit of Brenton Grant sworn 26 May 2020 filed in the Mounzer proceedings; and
v.The Affidavit of Hayssam Hamra sworn 25 May 2020 filed in both proceedings.
The respondents also rely on their written submissions.[6]
[6] FDN44.
The applicant reads and relies upon:
i.The Affidavit of Nicola Steven Fazzari sworn 9 September 2019 and filed in both actions on 10 September 2019 (“First Fazzari Affidavit”);
ii.Second Affidavits of Nicola Steven Fazzari sworn 7 November 2019 and filed in both proceedings (“Second Fazzari Affidavit”);
iii.Third Affidavits of Nicola Steven Fazzari sworn 13 December and filed in both proceedings (“Third Fazzari Affidavit”);
iv.Sixth Affidavit of Nicola Steven Fazzari sworn 28 April 2020 and filed in the Mounzer proceedings (“Sixth Fazzari Affidavit”);
v.Seventh, Eighth and Ninth Affidavits of Nicola Steven Fazzari sworn 28 April 2020, 29 May 2020 and 1 June 2020 respectively and filed in the Mounzer proceedings (“Seventh”, “Eighth” and “Ninth” “Fazzari Affidavit” respectively).
The applicant also relies on its written submissions.
Objections
Mr Hamra and Satori object to numerous paragraphs in the Third and Sixth Fazzari Affidavits and have filed a table of their objections.[7] They do so on the grounds that the applicant deposes to matters and exhibits documents to those affidavits which do not relate to the pleaded cases and, they submit, are not relevant to either of the Mounzer or Internal Lynx proceedings. The objections extend to facts and evidence relevant to the Lincoln Creek proceedings, which it is submitted are not relevant to the security for costs argument as security is sought only in the Mounzer and Internal Lynx proceedings.
[7] FDN44.
Without doing a disservice to the submissions of Mr Douglas, who appeared as counsel for Mr Hamra and Satori, the short point is that the applicant relies on a number of matters in support of its submission that the conduct of Mr Hamra and Satori have contributed to or is the cause of the applicant’s impecuniosity which are not pleaded in either the Mounzer or the Internal Lynx proceedings.
Mr Douglas describes the approach taken by the applicant as suffering from three evils:
i.First, the Court is being asked to make a decision on matters that will never be finally litigated or determined in litigation before the Court;
ii.Second, if the pleaded issues are not enough to show that Mr Hamra and/ or Satori are the architects of the applicant’s impecuniosity, reference to the non-pleaded matters works an unfairness on them by causing them to have to engage with issues that are not otherwise being pressed and are thus irrelevant and should be excluded from consideration; and
iii.Third, there is a practical difficulty that confronts a respondent if this approach is taken in that although Mr Hamra and Satori focuses on the pleaded case against it, nonetheless it may need to engage in a collateral debate about issues that have nothing to do with the pleaded case.
Mr Hamra and Satori contend that in order to establish that they engineered the applicant's impecuniosity the applicant raises matters that extend far beyond the pleaded facts and thereby are not relevant. They submit further that none of the authorities referred to by the applicant display an approach where a court has permitted evidence of an extensive kind about issues that are outside the needs and limits of the claim.
Mr Lazarevich who appeared as counsel for the applicant submitted that the objections arise out of a narrow view of what is relevant such that if a matter is pleaded by the applicant in (say) action 980 of 2019, then it cannot be used in opposition to the application for security for costs in action 981 of 2019.
Mr Lazarevich concedes that the applicant relies on matters outside the scope of the Mounzer and Internal Lynx proceedings, but submits they are matters relevant to the security for costs application. He further submits that where there are multiple proceedings with similar subject matter, it is not logical to exclude evidence just because it was not pleaded in the particular action to which the security for costs application relates.
Mr Lazarevich submits that one of the reasons there are numerous sets of proceedings specifically, three in this Court and one in the Magistrates Court, is that there was a need to act quickly in some of the actions.
In relation to both the Mounzer and Internal Lynx proceedings, the actions were commenced without Mr Hamra and Satori as parties.
The Mounzer proceedings commenced as an action to enforce a workers lien, as did the Internal Lynx proceedings, and then when further matters came to light, evolved into an action involving both Mr Hamra and Satori. Mr Lazarevich submits that it was because the director of Fazche, Nicola Steven Fazzari (“Mr Fazzari”) did not understand why Fazche was losing money and was becoming insolvent that he made investigations. The actions have proceeded on a piecemeal basis a result of information coming from those investigations.
Mr Lazarevich submits that if a party has breached their fiduciary duty which has resulted in a number of different proceedings, then there is no reason why a court should not have regard to those matters in considering whether or not the conduct of the respondent or respondents, who are common to all of the proceedings, should not be taken into account.
I am told by counsel that there is no decision specifically on point.
In my view, the question of objections can be determined by the application of the principles which apply to the exercise of the discretion in deciding whether or not to make an order for security for costs.
I deal with those principles below and then return to the topic of objections.
Legal Principles
Section 1335(1) of the Corporations Act (“Act”) provides:
1335 Costs
(1)Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.
The legal principles applying to an application for a security for costs pursuant to s 1335(1) of the Act are well settled.
Under that section there is a two-step process. First, what is referred to as the threshold question must be satisfied, ie: is there ‘credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the respondent if successful in his, her or its defence?’. The onus of proof for this first step is on the party seeking security.
Upon the threshold being satisfied, the onus shifts to the party opposing the order to establish that, in the exercise of the court’s discretion, security should not be ordered.[8]
Threshold
[8] Concrete Mining Structures Pty Ltd v Cellcrete Australia Pty Ltd (No 2) [2016] FCA 360.
Fazche went into voluntary administration on 16 August 2019. On that basis the applicant concedes, quite properly, that the threshold question has been satisfied. The issue then becomes whether the Court, in the exercise of its discretion, considers it appropriate to order security.
Discretion
The Court’s discretion as to whether to order security for costs is unfettered.[9]
[9] Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates Pty Ltd (1986) 13 FCR 46 at 49-50.
In Harpur v Ariadne Australia Ltd,[10] when considering s 533 of the Companies (Queensland) Code, which was the predecessor to s 1335 of the Act, Connolly J referred to the judgment of Lord Denning MR in Sir Lindsay Parkinson & Co Ltd v Triplan Ltd,[11] where his Lordship said in relation to the use of the word “may” in the equivalent provision:
That gives the judge a discretion whether to order security or not. There is no burden one way or the other. It is a discretion to be exercised in all the circumstances of the case. With all respect, in principle that seems to be obviously right.
[10] [1984] 2 Qd R 523, 529 per Connolly J.
[11] [1973] 1 QB 609, 626.
In John Arnold’s Surf Shop Pty Ltd (in liquidation) v Heller Factors Pty Ltd[12] Mitchell J considered a number of authorities including Buckley v Bennell Design and Constructions Pty Ltd[13] before continuing:
I am of the opinion that to approach s. 363 with a pre-disposition to make an order for security for costs would be to fetter the discretion which the legislation has left unfettered. It would be, as it seems to me, equally wrong to exercise the discretion in favour of making an order merely because the section enables such an order to be made as it would be to refuse an order merely because the company is impecunious.
[12] (1979) 22 SASR 20, 34.
[13] [1974] 1 ACLR 301.
In Concrete Mining Structures Pty Ltd v Cellcrete Australia Pty Ltd (No 2),[14] Edelman J set out the factors to be considered by the Court in the exercise of its discretion whether to make an order for security for costs:
[14] [2016] FCA 360 [13].
(1) the likelihood of the applicant being unable to pay the respondent’s costs;
(2)the characteristics of the applicant including whether it is a corporation or a natural person, the wealth of the applicant, whether the applicant is a foreign resident and, if so, the assets held by the applicant in Australia;
(3)whether any impecuniosity of the applicant was caused by the respondent’s conduct which is the subject of the claim, to the extent to which that can be assessed;
(4) whether the application for security is oppressive;
(5)whether the award of security would deny an impecunious applicant a right to litigate;
(6)whether there are persons standing behind the applicant who are likely to benefit from the litigation;
(7)whether the persons standing behind the applicant have offered any security or personal undertaking to be liable for the costs, and if so, the form of that security or undertaking;
(8)whether the proceedings are in substance defensive in the sense of directly resisting proceedings already brought or seeking to halt the respondent’s self-help procedures so that the applicant is, in substance, forced to litigate;
(9) whether the application for security had been brought promptly;
(10)whether the applicant has any rights which it can exercise against assets of the respondent to satisfy an order for costs in its favour;
(11)the strength and bona fides of the applicant’s case, although this will invariably only be determined in a provisional manner and in many cases will only be a broad brush impression of little weight; and
(12) any factors relating to the public interest.
It is clear from the authorities to which I have referred that once enlivened, the Court’s discretion in a matter involving an application for security for costs is unfettered, save of course that the discretion must be exercised judicially and that the exercise of the discretion may be set aside:
If the judge acts upon a wrong principle, if he[15] allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed… [16]
[15] The reference to “he” is an historical artefact.
[16] House v The King (1936) 55 CLR 499, 505.
Consideration of objections
In Professor Dal Pont’s text ‘Law of Costs’[17] it is observed that courts are alert to attempts by applicants to cast upon respondents the consequences of the applicant’s financial circumstances which may be due to multiple causes. In particular, mere general assertions unsupported by evidence do not suffice.
[17] Gino Dal Pont, Law of Costs (Lexis Nexis Butterworths, 4th ed, 2018) [29.100] [29.103].
In Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd,[18] Edelman J referred to Melunu Pty Ltd v Claron Constructions Pty Ltd[19] and the judgment of Brownie AJ, where his Honour said that a submission that the defendant is the cause of the plaintiff’s impecuniosity:
[S]eems to be made frequently in response to an application for security for costs. I respectfully agree with the decision of Rolfe J in Dalma Formwork Pty Ltd v Concrete Constructions Group Ltd, where his Honour said that a respondent to a motion for security for costs relying upon this as a ground for resistance, must establish a real causal connection between the conduct and impecuniosity which, in the exercise of the Court’s discretion, would make it unjust to require security, and it must be established that the applicant for security for costs has been guilty of some form of misconduct or unacceptable business dealings qua the respondent, such as in this case, inappropriately making claims for and receiving monies for variations, which payments caused the respondent’s impecuniosity. Mere general assertions, not supported by evidence, will not suffice. To hold to the contrary would be to defeat the purpose of the rule and to the section.
[18] [2013] WASC 57 [46].
[19] [2004] NSWSC 1064 [31].
Professor Dal Pont notes that:[20]
The plaintiff must be ‘able to support [the] allegation with relatively straightforward and unambiguous evidence of a fairly compelling nature, because otherwise the hearing of the issue of security might become a trial within a trial’.[21] For this reason, it is not enough that the defendant’s conduct is merely a contributing factor – it must be the material contributor to or cause of the plaintiff’s impecuniosity.
[20] At [29.101].
[21] JH Haymes ‘Security for Costs: Extent of Discretion’ (1976) 120 Sol J 479, 480.
In Haskins Contractors Pty Ltd (In liq) v Sydney Airport Corp Ltd[22] Bergin J said:[23]
The other matter for consideration in this application is whether Haskins' impecuniosity has been caused by SACL. Needham J in M A Productions v Austrama Television Pty Ltd (1982) 7 ACLR 97 said at 100 that the court "can consider whether the want of assets experienced by the plaintiff is caused by the default of the defendants". It seems on the authorities that it is not enough that the conduct be merely a "contributing" factor - it must be the material contribution or cause of the impecuniosity: J & M O'Brien Enterprises Pty Ltd v The Shell Co of Australia Ltd (1983) 7 ACLR 790 at 795.5; KP Cable Investments v Meltglow at 197. In Newtons Travel Services Pty Ltd v Ansett Transport Industries (Operations) Pty Ltd (1982) 7 ACLR 556 Smithers J said at 558 that a relevant factor for consideration was "whether the impecunious state of a plaintiff company could be said to be due to some material extent to the conduct of the company itself".
[22] [2002] NSWSC 267.
[23] Ibid at [52].
The paragraphs to which objection is taken are in some cases of general application and in the case of the Sixth Fazzari Affidavit cross-refer to the Third Fazzari Affidavit. By way of example, Mr Hamra and Satori object to Mr Fazzari deposing to the profitable status of Fazche in the 2014, 2015 and 2016 financial years by cross-referring to paragraph 8 of the Third Fazzari Affidavit. In another case, the objection is to Mr Fazzari deposing in his Sixth Affidavit that Fazche’s financial position is as a result of the actions of Mr Hamra and/ or Satori in circumstances where that allegation is not pleaded.[24] That paragraph, was it not in an interlocutory application, may well be objectionable as a conclusion, however I consider that a party may depose to what it alleges is the financial consequence of the actions of the party seeking security for costs. In that situation, it is a matter of weight such that if there was no or limited supporting material, it may well be that a court gives no weight to such an assertion. On the other hand, if there was a significant amount of supporting material it may be that the matter gives the assertion some considerable weight.
[24] Sixth Fazzari Affidavit [2.1].
In my view, it would be anomalous if the Court was not able to consider the financial statements of the applicant in the years surrounding those in which the impugned actions of Mr Hamra and/ or Satori are said to have occurred as well as specific actions taken by Mr Hamra and/ or Satori so as to allow the inference to be drawn, at least at an interlocutory stage, that there is reason to believe the actions of Mr Hamra and/ or Satori have had a material contribution to or have caused the impecuniosity of the applicant.
Accordingly, given there is an allegation that the conduct of Mr Hamra and Satori have contributed materially to or caused the applicant’s impecuniosity it is appropriate in considering whether to exercise the Court’s discretion to take into account facts and evidence external to the present proceedings provided they are relevant to that question.
I have considered each of the objections to the Third and Sixth Fazzari Affidavits. Having considered each of the objections I will not receive into evidence the matters deposed to in paragraphs 13.4-13.7 of the Third Fazzari Affidavit. As to the Sixth Fazzari Affidavit, I will not receive the matters deposed to in paragraphs 18-23, 25, 27, 49-52. Aside from these paragraphs, I will receive the affidavits read and relied upon by the applicant.
Applicant’s submissions on the exercise of the discretion
There are two sets of proceedings before the Court, which together with the Lincoln Creek proceedings the common feature of Mr Hamra and Satori as parties to each set of proceedings. That fact alone is of limited weight.
The applicant submits that the mere fact that an applicant had brought an apparently bona fide claim and happens to be impecunious does not justify the making of an order for security for costs. That principle is not in dispute.
The applicant opposes an order for security for costs on the basis that:
i.Mr Hamra and what it describes as “related entities”, by which I understand includes Satori, is a material contributor or the cause of Fazche’s impecuniosity;
ii.Mr Hamra has not disclosed a meritorious defence to the actions;
iii.The litigation will benefit the creditors of the applicant under the term of the DOCA; and
iv.In all the circumstances, it would be unjust to order security.
Mr Hamra is the cause of Fazche’s impecuniosity
In the First Fazzari Affidavit,[25] Mr Fazzari deposes that Mr Hamra had an active role in Fazche from its incorporation on 12 April 2011[26] and deposes that the practice whilst Mr Hamra was working with Fazche was that contracts were to be signed only by Mr Fazzari.[27]
[25] FDN6A – both actions.
[26] First Fazzari Affidavit [13], Exhibit NSF1.
[27] First Fazzari Affidavit [15].
The applicant submits that, apart from its first year of operation in 2013, it had always been profitable, until an abrupt change in circumstances in the 2017 and 2018 financial years. The applicant refers to the Third Fazzari Affidavit which deposes to the profit made by the applicant in the 2014, 2015 and 2016 financial years of $138,378, $357,478 and $233,741 respectively.[28] A consideration of the balance sheet for each of those years also reveals an improving net asset position.
[28] Fazzari Affidavit [8], Exhibit NSF2.
The applicant refers to a report to creditors from the administrator, BRI Ferrier, dated 12 September 2019 for the 2017 and 2018 financial years,[29] which reveals that Fazche suffered a loss of $67,905 in 2017 and $1,510,599 in 2018.
[29] Sixth Fazzari Affidavit, Exhibit NSF4, p 63.
In the same report,[30] it is reported that the losses sustained in the 2018 financial year were, in the circumstances, an indication that contracts had been underquoted.
[30] Ibid.
According to Mr Fazzari, Fazche started suffering financial pressure in 2017, at which time he invested over $1.185 M of his personal funds to keep the company solvent.[31] Mr Fazzari continues that in or about 2017 he had a falling out with Mr Hamra and deposes that the reason for that falling out was he considered Mr Hamra was not being honest in his dealings with him.[32] I am unable to determine at this stage if that is the case or not and I give that statement as to Mr Hamra’s honesty no weight.
[31] First Fazzari Affidavit [19].
[32] First Fazzari Affidavit [17].
Mr Fazzari alleges that Mr Hamra has taken company monies in the order of $450,000 and applied them for his own purposes.[33] He also alleges that during this period[34] Mr Hamra underquoted on jobs, charged expenses for building work to Fazche, diverted Fazche income to other companies associated with Mr Hamra and used company money to pay for renovations to his personal home. Mr Fazzari then sets out the basis for these allegations in paragraphs 13-17 of his Third Affidavit, some of which I have not received into evidence.
[33] First Fazzari Affidavit [18]-[20].
[34] Third Fazzari Affidavit [12].
Mr Fazzari deposes that in 2019, Fazche returned to profitability[35] and that he also contributed from both personal resources, and the resources of related entities, the sum of $1,241,965 during the period 21 February 2019 to 8 July 2019 as well as other contributions.[36]
[35] Sixth Fazzari Affidavit, Exhibit NSF3, p 41.
[36] Third Fazzari Affidavit [19], [22].
The applicant observes that Fazche became insolvent due to a market increase in the cost of goods sold in 2017 and 2018 which was insufficient to cover the costs of construction. It submits this occurred when Mr Hamra entered into contracts, allegedly on the applicant’s behalf, where jobs were done at significant undervalue for friends and relatives, specifically the Mounzer and Internal Lynx contracts, and where income from at least the Mounzer contract was diverted from the applicant to Satori.
In the Lincoln Creek proceedings the applicant also alleges that Mr Hamra misused ATM and fuel cards.
Internal Lynx Proceedings
Mr Fazzari refers to the two land contracts the subject of the Internal Lynx action.[37]
Encounter Bay[38]
[37] First Fazzari Affidavit [22]-[41].
[38] First Fazzari Affidavit [26]-[33].
Mr Fazzari deposes that the Encounter Bay contract is for the sum of $70,000 and is for a three bedroom, two bathroom, double garage, two-storey house totalling 192 square metres. He deposes that the Contract is not signed by him, it is not possible to build a house such as that for $70,00 and that having reviewed the books and records of Fazche, it has paid out of pocket costs of $322,479.39 on this contract. There were also Variations of $31,038 giving a total of approximately $418,000.
Hillbank Land[39]
[39] First Fazzari Affidavit [34]-[41].
Mr Fazzari deposes that the building contract for the Hillbank land was signed by Mr Hamra and is in the sum of $101,500. The house consists of three bedrooms, two bathrooms, a double garage and is single storey comprising 233 square metres. Mr Fazzari deposes that a house such as that could not have been built for $101,500. He has considered the spreadsheet of the actual costs spent by Fazche on the Hillbank contract which totalled $178,233.76. He deposes that Fazche has received $85,286 for the building works.
Mounzer Proceedings
In the Mounzer proceedings, Mr Fazzari deposes[40] that the contract for the construction of a house on land at Salisbury Downs was signed by Mr Hamra on 28 April 2017. The contract price was $151,818.81 for a house consisting of three bedrooms, two bathrooms, a single garage and of two storey construction totalling 172.4 square metres. He deposes that the true cost of the construction of a residence such as this is $262,491 based on a 20% profit margin, however the price on the contract was $151,818.81. Further, he deposes that although the contract was for the construction of one house on one allotment, nonetheless civil works were carried out on the remaining two allotments at a cost of $21,791.
[40] First Fazzari Affidavit [44]-[55].
Mr Lazarevich also refers in his submissions to the affidavit of Raid Mounzer, Sami and Leila Mounzer’s son, sworn 1 October 2019. Raid Mounzer deposes that on 28 April 2017, being the day the Contract was signed, the sum of $51,700 was paid to Satori on the instruction of Mr Hamra and on 19 May 2017 a further sum of $100,000 was paid to Satori, also on the instructions of Mr Hamra.
Lincoln Creek Proceedings
The Lincoln Creek proceedings concerns, amongst other things, Mr and Mrs Hamra’s residence, the use by Mr Hamra of a Fazche fuel card during the period between March 2017 and October 2018 and a Fazche Bank SA debit card during the period between August 2014 to December 2017, as well as another contract at Fairview Park.
Mr Fazzari deposes to the issue of renovations to Mr and Mrs Hamra’s residence in his Sixth Affidavit.[41] He deposes that Mr Hamra’s wife owns a property at Radnor Avenue, Rostrevor, which is the Hamra’s matrimonial home. The applicant was building a number of dwellings on five blocks of land at Radnor Avenue, Rostrevor as part of a subdivision of land previously owned by Mrs Hamra. The building contracts for the Rostrevor project were executed between October 2015 (Lau & Ting) and February 2017 (Feng).[42]
[41] Sixth Fazzari Affidavit [28]-[38].
[42] Sixth Fazzari Affidavit [31], Exhibit NSF14.
Mr Fazzari deposes that the applicant lost money on the Rostrevor subdivision as a result of which he investigated the reasons. He deposes further that he learned by looking at various invoices that Mr Hamra had caused invoices for work done on his matrimonial home to be charged to the applicant and allocated to the Rostrevor subdivision.[43]
[43] Sixth Fazzari Affidavit [28]-[36].
Exhibit NSF16 to Mr Fazzari’s Sixth Affidavit is a bundle of invoices for work done on the Hamra’s residence but charged to other jobs on the Rostrevor subdivision. Mr Fazzari continues that he has identified invoices totalling $444,547.25 charged to various clients and civil works on the Rostrevor subdivision but which relate, on the face of the invoices, to work at the Hamra’s property at Radnor Avenue. Those invoices are set out as a spreadsheet at Exhibit NSF17 to Mr Fazzari’s Sixth Affidavit.
No meritorious defence
The applicant submits that the defence filed by Mr Hamra and Satori is internally inconsistent and contains explanations by Mr Hamra that are “devoid of logic”. It submits that the defence makes senseless assertions such as that Fazche, through its director, would agree to perform work at a loss by doing jobs at for customers for significant undervalue and then divert that income to Mr Hamra’s entities rather than the company.
The applicant provided examples of these alleged illogical assertions.
In the Mounzer proceedings, it observed that Mr Hamra alleges that the Mr Fazzari agreed that a $20,000 deposit be paid, agreed to a discounted contact price and agreed that the balance be paid in advance because he was concerned about the amount of tax being paid that financial year. The applicant contends this makes no sense as it is of no benefit to the company to make a significant loss. Further, it submits it is in breach of section 30 of the Building Work Contractors Act, which precludes payments to be made in advance of the work being performed, as well as contrary to the terms of the contract itself, which requires payments to be made after certain milestones are reached.
In the Internal Lynx proceedings, Mr Hamra asserts that the standard building price is $1100 to $1200 per square meter. The applicant submits that this is inconsistent with his defence in these proceedings, where he asserts that the Encounter Bay property could be built for $70,000, ($364/m2) and the Hillbank property could be built for $101,500 ($435/ m2).
As to the Lincoln Creek proceedings, the applicant notes that Mr Hamra acknowledges Fazche paid for the renovations to his house, however Mr Hamra says this was to Mr Fazzari’s knowledge and that he was owed that money under a shareholder’s commission agreement. The applicant submits that Mr Hamra has put forward no evidentiary basis that he was entitled to a company payment in the form of house renovations and denies there ever being such an agreement. The applicant notes that Mr Hamra has not put forward any records substantiating his assertions and submits that at the very least, Mr Hamra would have to show that the applicant received its building costs and made a profit of at least 20% for him to be able to receive a commission.
The benefit of the actions will flow to creditors
The applicant invites the Court to find that the proceedings are taken in good faith for the benefit of creditors.
I have considered the DOCA.[44] Clause 5 deals with the Deed Fund and provides in clause 5.2(a)(v) that the Deed Fund comprises, amongst other things, 60% of the net recovery from the Legal Actions.
[44] Third Fazzari Affidavit, Exhibit NSF3.
“Legal Actions” is defined in clause 1.1 as including the Mounzer action and the Internal Lynx actions as well as any other legal action taken in respect of events occurring prior to 16 August 2019 or which may be commenced during the operation of the DOCA.
“Net recovery” is defined as:
… the net recoveries from the Legal actions calculated as follows:
(a) the gross proceeds from the resolution of the Legal Actions; less
(b) the legal costs and disbursements reasonably incurred in resolving the Legal Actions.
Non-Participating Creditors is defined as:
(a) the Proponent; and
(b) all Related Entities of the Proponent including, without limitation:
(i)Mr Nicola Fazzari;
(ii)Ms Maria Fazzari;
(iii)Mr Trevor Fazzari;
(iv)Fazzari Developments;
(v)Fazzari Investments;
(vi)Fazzari Group; and
(vii)Damn Cheap Wholesales.
The recovery of 60% of the net recovery from the legal actions set out in clause 5.2(a)(v) of the DOCA is subject to clauses 6.1(d), 6.1(e), 6.3(d), 6.3(e), 6.4(d) and 6.4(e). Those provisions vary the amount of the net recovery to 100% payable into the Deed Fund in circumstances where the Deed Administrator obtains external funding (6.1(d), 6.3(d) and 6.4(d)) or assigns a legal action (clause 6.1(e), 6.3(e) and 6.4(e)).
However, under clause 5.2(a)(vi), if within two years of execution of the DOCA the amount of $180,000 has not been contributed from net recoveries, Mr Fazzari has to make an additional payment of $180,000. The applicant submits this is an incentive to Mr Fazzari to resolve the legal actions promptly and an incentive to Mr Hamra to ensure they are not resolved within that period.
Clause 5.3 deals with the application of the Deed Fund. It provides that the fund is available to pay the admissible debts and claims of participating creditors and priority creditors but that no other property of the company is available to pay admissible debts and claims of participating creditors and priority creditors.
Clause 5.3B provides that the admissible debts and claims of creditors are separated into four separate categories, including non-participating creditors. Non-participating creditors is defined in clause 1.1 as including the proponent, that is Mr Fazzari, and related entities to Mr Fazzari.
Clause 5.3(e) provides that the admissible debts and claims of non-participating creditors will not be admissible under the DOCA and they will not be entitled to participate in any dividends declared and distributed in respect of the DOCA.
Under clause 6.3, Mr Fazzari is solely responsible for funding the legal actions whether from his own personal resources or the resources of related parties. Pursuant to clause 6.6 of the DOCA, any adverse costs orders made against Fazche in connection with any legal actions are to be paid in full by Mr Fazzari or his related entities subject to certain exceptions which are immaterial for the purposes of this matter.
Any adverse costs orders cannot be claimed by Mr Fazzari or any related entities from the Deed Fund, the Administrators or the Deed Administrator.[45]
To order security for costs would be unjust
[45] DOCA clause 6.6(b).
The applicant submits that the application is a weapon of oppression to stifle an otherwise genuine claim and the financial pressure put on the applicant by Mr Hamra at numerous levels is an attempt to stifle the litigation. The applicant describes the application as a ‘wider tactic’ to ensure Mr Fazzari runs out of money and cannot take the matters to trial. It uses the example of an insurance claim made by Mr Hamra to QBE Insurance in respect of the Mounzer property, however I have not received that material into evidence and I give that submission no weight.
It submits that Mr Fazzari has contributed personal funds to keep the actions going, and that Mr Fazzari has put himself and his related entities at significant cost risk by undertaking the proceedings when he could have easily walked away and left the creditors with nothing.
The applicant submits that instead, Mr Fazzari has contributed funds and exposed himself to an approximate $1.6 million liability under the DOCA and notes that Mr Fazzari is funding the proceedings to bring in resources which, if received, will flow to the creditors under the DOCA. It notes that Mr Fazzari has also paid security of $25,000 in the current proceedings in favour of the other respondents. It observes that Mr Fazzari has agreed to be personally liable for adverse costs orders in respect of the Mounzer and Internal Lynx proceedings.
Respondents’ Submissions
Mr Hamra and Satori are a cause of Fazche’s impecuniosity
Mr Douglas submits there are multiple potential causes to the financial circumstances of the applicant and the pleaded issues in the litigation are not enough for the Court to draw the conclusion that those matters alone show that Mr Hamra and/or Satori were the architect of Fazche’s impecuniosity.
They submit that the Court was only provided with a very thin wedge of information and was not told anything about the number of jobs or the level of work that Fazche was performing on a year-by-year basis. Mr Douglas submits that the Court has not had the benefit of having heard cross-examination of any witnesses on what he characterises as incomplete evidence, and the Court is not equipped to make solid findings on the evidence, which in any event are matters that need to be resolved at trial.
It is true the Court has not received the benefit of cross-examination of Mr Fazzari. It is equally true that there was no application made to cross-examine Mr Fazzari.
Unmeritorious Defence
As to an unmeritorious defence, Mr Douglas submits that the applicant is inviting the Court to make a preliminary adjudication that there is a strong claim and a weak defence, ultimately to exercise its discretion against security.
He submits further that this is not the approach taken by conventional authority in applications of this nature and that it is unsafe for the Court to proceed on matters alleged, such as Mr Hamra’s general statement in relation to costs per square metre, prior to hearing any evidence from a qualified expert.
The benefit of the actions will flow to the creditors
Mr Hamra and Satori acknowledge the applicant’s submission that the creditors stand to gain has some force. However, they highlight that Mr Fazzari has a 40% interest in any relevant recovery from the litigation and that he is not prosecuting the actions independently on behalf of Fazche for the purpose of meeting its costs and seeking a return to creditors.
Oppression
Mr Hamra and Satori submit that there is no foundation for the applicant’s contention that the security applications are oppressive. They submit that security is sought for the same reason as pressed by the co-respondents in their security application, that is Fazche is an impecunious company and the exercise of litigation exposes them to a significant cost impost. They also submit it is significant that Fazzari does not expressly say that an order for security would stultify the claims. They say the highest that it is put is that Mr Fazzari will not be able to raise security in the short term.
In relation to the personal funds Mr Fazzari has contributed to Fazche for funding the litigation, they submit that that this point was not enough to overcome his Honour Judge Chivell’s observation in the co-respondents’ application for security that there was insufficient evidence to assure the co-respondents that in the absence of an order for security Mr Fazzari will be in a position to meet a costs order. I note that submission, but on this occasion the applicant has placed a great deal more material before the Court which goes to the allegation that Mr Hamra and/or Satori are the cause of or have contributed to Fazche’s impecuniosity.
Ultimately, Mr Hamra and Satori submit that the Court should exercise its discretion to give them the same protection as given by his Honour Judge Chivell to the co-respondents. They urge the Court to have regard to Mr Grant’s quantification of costs[46] up to the first day of trial in the sum of $88,000 in action 980 of 2019 and $88,600 in action in action 981 of 2019.
[46] Affidavit of Brenton Grant sworn 2 April 2020.
Consideration
I have had regard to all the material put before me and counsels’ submissions.
Impecuniosity
There is no doubt that where there is an allegation made by an applicant who is facing a potential order for security for costs that it is the respondent’s conduct which has caused or contributed to the applicant’s impecuniosity, a court will inquire into it.[47]
[47] KP Cable Investments Pty Ltd v Metaglow Pty Ltd (1995) 56 FCR 189,197 per Beazley J.
The profit and loss statements exhibited to the Third Fazzari Affidavit reveals that in the financial years ending 30 June 2014, 2015 and 2016, Fazche made a net profit of $138,378.88,[48] $357,478.41[49] and $233,741.36[50] respectively.
[48] Third Affidavit of Nicola Steven Fazzari sworn of 13 December 2019, Exhibit NSF1.
[49] Ibid.
[50] Ibid.
The Report to Creditors prepared by BRI Ferrier,[51] records that Fazche suffered a net loss of $67,905 in the financial year ending 30 June 2017 and a net loss of $1,510,599 in the financial year ending 30 June 2018. The report also contains the percentage of costs of goods sold to construction income. The percentages went from 74.7% in 2016, to 81.5% in 2017 and 103.7% in 2018.[52]
[51] Sixth Affidavit of Nicola Steven Fazzari sworn of 28 April 2020, Exhibit NSF4.
[52] Sixth Affidavit of Nicola Steven Fazzari sworn of 28 April 2020, Exhibit NSF4.
Despite the company returning to profitability in 2019,[53] which the applicant submits was when Mr Hamra left, Fazche was placed into administration on 16 August 2019. The DOCA was accepted by creditors on 4 October 2019.
[53] Sixth Affidavit of Nicola Steven Fazzari sworn of 28 April 2020, Exhibit NSF3.
I am satisfied on the material available to me that aside from its first year of operation in 2013 Fazche was profitable until the years 2017 and 2018.
I am conscious that an application such as this is not the occasion for a mini-trial on the issue of the cause of Fazche’s impecuniosity.
Nonetheless, I find that the allegation that the conduct of Mr Hamra and Satori has contributed materially to or caused the impecuniosity of the applicant is supported by sufficient, straightforward and it would seem unambiguous evidence of a fairly compelling nature. In so finding, I am conscious that this is at an interlocutory stage and the allegations have not been tested.
Unmeritorious defence
I do not consider that Mr Hamra and Satori have an unmeritorious defence.
There are certainly a number of issues that will require resolution and on the face of it, prices per square metre of $364 and $435 appear low but the Court will need to hear evidence on that issue.
Action for the benefit of the creditors
Under clause 5.2(a)(v) of the DOCA,[54] the creditors stand to benefit by getting 60% of the net recovery of the legal proceedings. As to the remaining 40%, the DOCA is silent as to what happens to that money.
[54] Third Affidavit of Nicola Steven Fazzari sworn of 13 December 2019, Exhibit NSF3.
“Net recoveries”, as I have noted above, are the gross proceeds from the resolution of legal actions less the legal costs and disbursements reasonably incurred in resolving those actions. Whereas it is possible that an order for indemnity costs might be made in an action in the event that Fazche was successful, nonetheless on a party-party basis, approximately two thirds of the costs incurred are recoverable from the opponent if the action is successful. That remaining 40%, I am prepared to infer in the circumstances, will do no more than place Mr Fazzari and the related entities in a position whereby the costs of proceeding with the legal actions results only in a cost recovery result for Mr Fazzari and any related entities. That, of course, is not an exact science but it seems to me the effect of the DOCA in broad terms is that Mr Fazzari and related entities are to fund the legal actions and if successful, will be placed ultimately in what appears to be a close to cost recovery position.
On that basis, whereas the Court has no information as to the assets of those who stand behind Fazzari Investments Pty Ltd, the sole Fazche shareholder, the DOCA makes it clear that they will not benefit from a recovery other than the 40% which I have dealt with above.
Oppression
I have no evidence that an order for security will stifle the proceedings. As I have noted I also have no evidence as to the assets of related entities, although on the face of the DOCA it appears that those related entities will not benefit from the litigation.
I do not consider the application for security is a tactic to stifle an otherwise genuine claim.
Overall I consider that prosecuting the action, if successful, will be to the benefit of the creditors.
Prior orders for security in favour of other co-respondents
I note Fazche has paid security in favour of the other respondents in both the Mounzer and Internal Lynx proceedings and that Mr Fazzari has agreed to be personally liable for adverse costs orders made in those proceedings. In my view, the considerations which apply to the other respondents in both the Mounzer and the Internal Lynx matters are different to those which apply to both Mr Hamra and Satori.
Conclusion
In all of the circumstances, I am not persuaded that in the exercise of my discretion it is appropriate to make an order for security for costs.
I make the following orders:
1The application for security for costs in actions 980 and 981 of 2019 is dismissed.
2I will hear the parties on the question of costs including the quantum of these costs.
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