Gold Village Pty Ltd (in liq) v Sharma
[2021] VSC 600
•21 September 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
S ECI 2021 01553
| GOLD VILLAGE PTY LTD (IN LIQUIDATION) (ACN 604 255 736) | Plaintiff |
| v | |
| MANEESH SHARMA & ORS (according to the attached Schedule) | Defendants |
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JUDGE: | Irving AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 16 September 2021 |
DATE OF JUDGMENT: | 21 September 2021 |
CASE MAY BE CITED AS: | Gold Village Pty Ltd (in liq) v Sharma & Ors |
MEDIUM NEUTRAL CITATION: | [2021] VSC 600 |
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PRACTICE AND PROCEDURE – Security for costs – Where liquidator appointed and no assets available to meet cost order – Plaintiff’s claim under both limbs of Barnes v Addy – Where fifth defendant relies on indefeasibility of title – Claim fifth defendant caused or contributed to plaintiff’s impecuniosity not made out – Security ordered - Supreme Court (General Civil Procedure) Rules 2015 rr 62.02 - Corporations Act 2001 (Cth) s 1335 - Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311 - Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr T J Messer of counsel | Robert James Lawyers |
| For the Fifth Defendant | Mr D F McAloon of counsel | Piper Alderman |
HIS HONOUR:
By summons filed 20 August 2021, the fifth defendant (‘Bee’s Cap’) applies, pursuant to r 62.02 of the Supreme Court (General Civil Procedure) Rules2015 (Vic) and s 1335 of the Corporations Act 2001 (Cth), for security for its costs of the proceeding.
In support of its application, Bee’s Cap relies on the affidavit of Louise Gehrig sworn 10 August 2021.
The plaintiff (‘Gold Village’) opposes the application and relies on the affidavit of Robert Scott Ditrich sworn 3 September 2021 and the affidavit of Gurbaj Singh Mander affirmed 8 September 2021.
Background
The proceeding was commenced by writ on 13 May 2021. An amended statement of claim was filed on 14 July 2021 (‘amended claim’).
In short, Gold Village alleges that it has been deprived of its sole asset, a parcel of land, which was transferred for no consideration; first to Dream Place Pty Ltd (‘Dream Place’) and then to Bee’s Cap.
Gold Village alleges that the first to fourth defendants, Mr Sharma, Mr Singh, Mr Joshi and Mr Dhaliwal, all former directors of Gold Village, along with Mr Bisam (the sole director and shareholder of Bee’s Cap) colluded with each other to divest Gold Village of the property located at 1491-1505 Melton Highway, Bonnie Brook in the State of Victoria (‘land’).
By the amended claim, Gold Village says that:
(a) Mr Mander, the first to fourth defendants (Mr Sharma, Mr Singh, Mr Joshi and Mr Dhaliwal) and Mr Bisam agreed to form an association with the purpose to purchase and develop land;
(b) in February 2015, Gold Village was incorporated to act as the corporate vehicle for this purpose. The first to fourth defendants along with Mr Mander were directors of Gold Village at this time (‘Gold Village directors’);
(c) Mr Bisam was not a director of Gold Village. Bisam Corp Pty Ltd (‘Bisam Corp’), a company of which his wife was the sole director and shareholder, was a shareholder of Gold Village. Gold Village say that any knowledge of Mr Bisam is the knowledge of Bisam Corp, and vice versa;
(d) on 30 April 2015, Gold Village entered into a contract of sale to purchase the land for $2.5 million. Gold Village paid the deposit of $800,000. Gold Village was to borrow the $1.7 million balance of the purchase price from the vendor of the land pursuant to a loan agreement entered into between the parties; to be repaid, along with interest, over three years;
(e) the Gold Village directors guaranteed Gold Village’s obligations under the loan agreement;
(f) in March 2016, Mr Mander fell into a dispute with the other four directors of Gold Village. By his affidavit, Mr Mander deposes to contributing $82,500 towards the deposit and interest which had been paid by Gold Village under the contract of sale for the land and that he had later had demanded ‘a refund’;
(g) on 26 April 2016, Dream Place was incorporated. The first to fourth defendants were directors of Dream Place. Mr Mander was not;
(h) Bisam Corp, the company controlled by Mr Bisam’s wife, was a shareholder of Dream Place;
(i) on 11 May 2016, without Mr Mander’s knowledge, Gold Village nominated Dream Place as substitute purchaser under the contract of sale for the land. Gold Village says Dream Place paid no consideration for this nomination;
(j) on 8 August 2016, Dream Place became the registered proprietor of the land. It is the nomination and transfer to Dream Place which Gold Village allege constitutes the first fraudulent design;
(k) on 5 April 2017, Bee’s Cap was incorporated. Mr Bisam was the sole director and sole shareholder of Bee’s Cap and it is alleged that the knowledge of Mr Bisam is the knowledge of Bee’s Cap;
(l) on 22 April 2019, Dream Place was deregistered; and
(m) on 13 June 2019, Bee’s Cap was registered as the proprietor of the land. It is this transfer from Dream Place to Bee’s Cap which Gold Village allege constitutes the second fraudulent design.
Gold Village say that Bee’s Cap knew of the nomination and transfers constituting the first and second fraudulent design and that it used its position to obtain an advantage at the expense of Gold Village, constituting a breach of what it calls the Trustee Duties. It advances its claim against Bee’s Cap under both limbs of Barnes v Addy.[1]
[1](1874) LR 9 Ch App 244.
The relief sought against Bee’s Cap includes a declaration that Bee’s Cap holds all interests in the land on trust for Gold Village, an order requiring Bee’s Cap to do all things necessary to effect the transfer of the land to Gold Village, an account of profits, damages and costs.
On 24 May 2021, Bee’s Cap filed its appearance. On 24 June 2021, Bee’s Cap filed its defence and counterclaim. Gold Village filed the amended claim on 14 July 2021.
On 29 July 2021, the Court made orders, by consent, for the defendants to file their defences to the amended claim and for Gold Village to file any reply and defence to Bee’s Cap counterclaim. The matter was also referred for mediation to be held no later than 29 October 2021. A further directions hearing will occur after that date.
On 18 August 2021, Bee’s Cap filed a defence and counterclaim to the amended claim by which it denied:
(a) assisting Dream Place with the second fraudulent design;
(b) any knowledge of the circumstances constituting either the first or second design; and
(c) any knowledge that the transfer of the land to it was a transfer of trust property in breach of the Trustee Duties.
Further, Bee’s Cap says that it paid $3.4 million in consideration for the land pursuant to a contract of sale entered into in or around 6 August 2017. It also says it was a bona fide purchaser of the land for value without notice and takes the land free of any interest of Gold Village. By counterclaim, Bee’s Cap seeks declarations that it is the true owner of the land with indefeasible title, removal of the caveat registered over the land by Gold Village and compensation.
Bee’s Cap first requested security for its costs from Gold Village by way of letter dated on 7 July 2021.
Applicable legal principles
The applicable legal principles are not in dispute. Both parties referred me to the summary of those principles set out by Derham AsJ in Colmax Glass Pty Ltd v Polytrade Pty Ltd[2] (‘Colmax‘).[3] I gratefully adopt that summary.
[2][2013] VSC 311, [14]-[22].
[3]Counsel for Bee’s Cap also referred the Court to Hii v Federal Commissioner of Taxation (No 3) (2016) 238 FCR 304, [10]; All Class Insurance Brokers Pty Ltd (in liq) v Chubb Insurance Australia Limited [2020] FCA 840, [40]-[44] and General Trade Industries Pty Ltd (in liq) v AGL Energy Limited [2020] FCA 1562, [32]-[34].
Submissions
The fifth defendant, Bee’s Cap, via its counsel, submitted:
(a) on the plaintiff’s own evidence, it is impecunious. There is thus a rational belief that the plaintiff will be unable to pay the fifth defendant’s costs if ordered. As a consequence, the Court’s jurisdiction to order security is enlivened;
(b) there is an insuperable legal impediment to the relief sought against the fifth defendant, such that it is bound to fail;
(c) there is good authority for the contention that a claim under Barnes v Addy is not a personal equity which defeats the indefeasibility provisions of the Transfer of Land Act 1958 (Vic). The plaintiff’s claim, as presently formulated against the fifth defendant, cannot secure the relief sought;
(d) the plaintiff has not established that any order for security would stultify the plaintiff’s claim. If the plaintiff’s claim against the fifth defendant is stayed because it fails to provide any security ordered by the Court, there would be no impediment to the plaintiff’s claims against the other defendants proceeding;
(e) the persons who stand to benefit from any recovery in plaintiff’s claim are Mr Mander (the sole creditor of the plaintiff who is not a defendant to the proceeding), the plaintiff’s liquidator (where costs in the liquidation have reached $250,000 to date and will not be met from other assets) and the plaintiff’s legal representatives (who act on a speculative basis). The conduct of the proceeding is being funded by the liquidator and the plaintiff’s legal representatives. There is no evidence that those who stand behind the company are unable to provide security;
(f) the fifth defendant did not cause the impecuniosity of the plaintiff, and in any event, this factor is irrelevant if stultification is not made out; and
(g) the plaintiff has not discharged the heavy onus of demonstrating the fifth defendant’s conduct was the material contributor to or cause of the plaintiff’s impecuniosity and not merely a contributing factor. Here, the plaintiff seeks to link its impecuniosity to it not holding an interest in the land. The transfer of the land to Dream Place was registered on 8 August 2016. The fifth defendant was only incorporated in April 2017.
Counsel for the plaintiff, Gold Village, submitted:
(a) the plaintiff has, at a minimum, reasonable prospects of success;
(b) the directors of the plaintiff had a duty to preserve the plaintiff’s interest in the land. Instead, they schemed to divest the plaintiff of its interest in the land for no consideration in order to thwart Mr Mander’s claim for return of the monies he had paid towards the deposit;
(c) Mr Bisam, the controlling mind of Bisam Corp and Bee’s Cap, was aware of and participated in the fraudulent designs. The fifth defendant, Bee’s Cap, was not an arm’s-length purchaser and Mr Bisam’s alleged involvement in the fraudulent designs militates against the exercise of the Court’s discretion to order security in favour of what is, in effect, Mr Bisam’s company;
(d) the plaintiff’s impecuniosity was caused, or contributed to, by Bee’s Cap’s conduct. Bee’s Cap acquired its interest in the land in ‘opaque’ circumstances, involving transactions that were neither at arm’s-length nor ‘founded on a proper commercial basis’. The transactions formed part of the overall scheme of fraudulent designs intended to put the land out of the reach of Mr Mander; and
(e) any order for security would stultify the pursuit of a legitimate claim. The plaintiff is without assets; there is no-one funding the litigation and Mr Mander is not in a position to give security. The claim has been instituted on the instructions of the liquidator so that he may discharge his function of paying a dividend to creditors. If security is ordered it will frustrate the liquidator in the discharge of his duty under the Corporations Act 2001 (Cth).
The evidence
Ms Gehrig is Bee’s Cap’s solicitor. Her evidence is that:
(a) on 10 June 2020, the plaintiff was wound up in insolvency. Robert Ditrich was appointed liquidator (‘Liquidator’). The Liquidator is not a party to the proceeding;
(b) on 7 July 2021, Ms Gehrig wrote to Mr Ditrich, explaining that Bee’s Cap had formed the view that Gold Village has no assets to meet an adverse costs order should one be made, that Bee’s Cap understood the plaintiff has not entered into a litigation funding arrangement in relation to the proceeding and seeking security for costs up to and including mediation in the sum of $45,000;
(c) on 14 July 2021 Ms Gehrig received the plaintiff’s response refusing to provide security for costs and outlining the reasons for that refusal;
(d) the plaintiff’s correspondence suggests that the plaintiff’s only potential asset is its claim in the proceeding. The plaintiff has provided no evidence regarding the source of its ability to meet the legal costs of the proceeding;
(e) as at 10 August 2021, Bee’s Cap has incurred $30,748.47 in relation to the proceeding and is estimated to incur further costs of about $71,215 up to and including the mediation; and
(f) Bee’s Cap seeks an order for security for costs in the amount of $70,000, being slightly less than 70% of its aggregate costs up to the mediation.
In addition to the factual matters outlined above, Mr Mander’s evidence is that:
(a) Mr Mander is a self-employed truck driver earning $80,000 per annum before tax. He supports a wife and two children. His wife works part time as a schoolteacher;
(b) Mr Mander had issued proceedings in the Magistrates’ Court of Victoria against Gold Village and obtained judgment in his favour against Gold Village in the sum of $82,500 on the claim, interest of $28,265 and costs of $22,932.60 (‘judgment debt’);
(c) Mr Mander is not in a position to contribute to security for costs for the plaintiff because he has ‘personally spent approximately $67,000 to date in legal fees to recover [his] initial contribution [to] the Company’;
(d) Mr Mander is not funding the Liquidator in the proceeding and has not contributed financially to the proceeding;
(e) in total, Mr Mander’s involvement with the plaintiff has cost him approximately $150,000 – being his initial contribution of approximately $80,000 and $67,000 in legal costs; and
(f) if the plaintiff’s claim is stayed because of an order for security for costs, Mr Mander does not expect to recover any of the judgment debt amount owed to him by Gold Village.
The Liquidator, Mr Ditrich’s, evidence is that:
(a) he was appointed liquidator of the plaintiff by order of the Court dated 10 June 2020;
(b) there are currently no assets in the liquidation that could be realised for the benefit of creditors and the plaintiff is not able to offer any sum by way of security for any of the defendants’ costs of this proceeding;
(c) the plaintiff’s impecuniosity was caused by the defendants’ conduct;
(d) the Liquidator, plaintiff’s lawyers and counsel in the proceeding are acting on a speculative basis;
(e) there is no other person willing to put up security for costs;
(f) any order for security for costs would stultify the plaintiff’s claim and be oppressive and unjustified in the circumstances of the allegations against the defendants;
(g) if the claim is stultified there will be no funds to meet Mr Mander’s claim, or pay any other creditors of the plaintiff or to meet the approximately $250,000 current costs of the liquidation;
(h) the plaintiff’s bank account statements show that Mr Bisam in his personal capacity contributed $52,000 towards the deposit under the contract of sale for the land;
(i) the ASIC documents lodged in relation to the registration and deregistration of Dream Place were lodged by Mr Bisam’s accounting practice;
(j) on 5 April 2021, Bee’s Cap was incorporated with Mr Bisam being the sole director and shareholder;
(k) on 12 April 2021, the Liquidator wrote to Bee’s Cap requesting it provide evidence of payment of the $3.4 million paid in consideration for the land;
(l) on 27 April 2021, Bee’s Cap’s lawyers declined to provide this evidence;
(m) further requests for this evidence were made by letters dated 5 May 2021 and 2 July 2021;
(n) some documents were provided by Bee’s Caps lawyers on 14 July 2021, however these have not satisfied the Liquidator that Bee’s Cap has paid the $3.4 million;
(o) Bee’s Cap did not obtain leave to file its counterclaim pursuant to s 471B of the Corporations Act 2001 (Cth); and
(p) the Liquidator believes the directors of the plaintiff have negligible assets.
The threshold question
It is not in dispute that Gold Village will be unable to pay the costs of Bee’s Cap if Bee’s Cap is successful in its defence.
I turn now to the relevant discretionary considerations identified by the parties; Gold Village’s prospects of success, stultification and whether Bee’s Cap caused Gold Village’s impecuniosity.
The plaintiff’s prospects of success
Both Bee’s Cap’s and Gold Village’s counsel made substantive submissions on Gold Village’s prospects of success.
Counsel for Bee’s Cap asserted that this is an unusual case, in that Gold Village’s pleaded case against Bee’s Cap is bound to fail. Significant weight was placed on Mathieson Nominees Pty Ltd v Aero Developments Pty Ltd[4] and Farah Constructions Pty Ltd v Say-Dee Pty Ltd[5] as authority for the propositions that:
(a) a claim under Barnes v Addy is not a personal equity which defeats the indefeasibility provisions of the Transfer of Land Act 1958 (Vic); and
(b) there is a distinction between cases in which a constructive trust had been granted over registered land where the relevant defendant was a primary wrongdoer as opposed to a knowing recipient who merely had notice of an earlier interest.
[4][2016] VSC 131, [198]-[208].
[5](2007) 230 CLR 89, [195].
Counsel for Gold Village disagreed that Gold Village’s claim was bound to fail. He noted that the claim against Bee’s Cap was brought under both limbs of Barnes v Addy. Counsel submitted that a close reading of the authorities[6] did not support Bee’s Cap’s submission that Gold Village’s claim was doomed to fail.
[6]Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133; Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 90, [193]-[195]; White City Tennis Club Ltd v John Alexander’s Club Pty Ltd & Anor [2009] NSWCA 114, [101].
I endorse the comments in the authorities that, on an application for security for costs, it is not practicable to reach a clear view about the merits and relative strengths of the claim and counterclaim.[7]
[7]Re Credit Clear Ltd [2021] VSC 287, [45] and [47].
I am however satisfied that Gold Village’s claim is bona fide and arguable.
I have regarded this factor as neutral.
Security order would stultify a legitimate claim
I am not satisfied that an order for security for costs would stultify Gold Village’s claim.
I accept that Gold Village is without assets, and that Mr Mander has limited income. However, Mr Mander’s affidavit does not go to his available assets, ie his ability, rather than willingness, to fund the litigation. Rather, Mr Mander states that he is not in a position to fund the proceeding because he has already spent considerable sums in an effort to recover monies he paid towards Gold Village’s deposit.[8]
[8]Longjing Pty Ltd v Perpetual Nominees Ltd [2017] NSWSC 1690, [61].
I also accept that the Liquidator and legal representatives for Gold Village are acting on a speculative basis. In that sense, they stand to benefit from the litigation if it is successful.
There is no evidence the Liquidator has requested the creditors to provide litigation funding nor evidence that he has explored the possibility of commercial litigation funding.[9] There is no evidence before the Court as to the capacity of the Liquidator or Gold Village’s legal representatives to meet the costs of Bee’s Cap.[10]
[9]Kavcor Pty Ltd (in liq) & Anor v Kavanagh [2005] NSWSC 1163, [14].
[10]Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1, 4; Longjing Pty Ltd v Perpetual Nominees Ltd [2017] NSWSC 1690, [46]-[49].
Where a respondent to an application for security for costs asserts that such an order would stultify the proceeding, it is incumbent on that respondent to fully explain to the Court how the proceeding is to be funded to completion.[11]
[11]Longjing Pty Ltd v Perpetual Nominees Ltd [2017] NSWSC 1690, [58].
Accordingly I have given this matter no weight.
Plaintiff’s impecuniosity caused by the fifth defendant
Gold Village claims its impecuniosity has been caused or contributed to, by the conduct of the defendants and Mr Bisam (on behalf of Bee’s Cap) acting in concert.
This assertion is itself somewhat different to an allegation that Bee’s Cap caused Gold Village’s impecuniosity.
Gold Village’s assertion can only be made out by drawing inferences about the actions of Mr Bisam, in his capacity as a shareholder, as the accountant for the project and as the guiding mind behind Bisam Corp and Bee’s Cap.
Bee’s Cap must be the material contributor to or cause of the plaintiff’s impecuniosity, not merely a contributor. This is a difficult thing to prove,[12] particularly at this stage of the proceeding and in circumstances where Bee’s Cap was incorporated after the first fraudulent design alleged by the plaintiff.
[12]Coonwarra Pty Ltd v Cornonero Pty Ltd & Ors [2018] VSC 333, [6]-[8].
In my view, Gold Village, has not discharged the heavy onus of demonstrating that Bee’s Cap, has caused the plaintiff’s impecuniosity.
Fifth defendant’s cross-claim raising the same facts
In Colmax, Derham AsJ raised the observations of Smart J in Sydmar Pty Ltd v Statewide Developments Pty Ltd[13] about the potential injustice arsing where a plaintiff’s claim is stayed while a defendant’s counterclaim proceeds and does so on substantially the same factual area as the claim.
[13](1987) 73 ALR 289.
I am satisfied that there is some overlap in the facts relevant to the plaintiff’s claim and Bee’s Cap’s counterclaim, particularly around whether and how Bee’s Cap paid for the land. Bee’s Cap’s counterclaim does, however, raise additional issues about the impact of the caveat on Bee’s Cap’s ability to refinance.
Quantum
The solicitor for Bee’s Cap has provided the Court with a detailed calculation of the costs incurred to date and still to be incurred from commencement to completion of the mediation. The costs and disbursements, calculated by reference to the Supreme Court Scale come to approximately $100,000.
Decision
The parties agree that the jurisdiction of the Court to order security for costs has been enlivened.
It is well established that the Court has an unfettered discretion to order security, but that the very fact that the jurisdiction has been enlivened may itself be a factor, even a significant factor in the exercise of the jurisdiction.[14]
[14] Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311, [17].
I am satisfied that there should be an order for security for Bee’s Cap’s costs up to and including the mediation.
I take into account that discovery is yet to be made but in my view, it is unlikely to be voluminous.
The sum of $100,000 to finalise pleadings, discovery and complete mediation seems to me to be excessive having regard to the steps remaining before the mediation and the amount and the costs incurred up to 10 August 2021. I have also discounted Bee’s Cap’s costs for some overlap between the claim and counterclaim and reductions on taxation. In my view it is appropriate that security be ordered in the sum of $25,000.
I will hear from the parties on the appropriate terms of the order.
SCHEDULE OF PARTIES
| S ECI 2021 01553 | |
| BETWEEN: | |
| GOLD VILLAGE PTY LTD (IN LIQUIDATION) (ACN 604 255 736) | Plaintiff |
| - and - | |
| MANEESH SHARMA | First Defendant |
| JEETPAL SINGH | Second Defendant |
| HIMANSHU JOSHI | Third Defendant |
| RAJPREET DHALIWAL | Fourth Defendant |
| BEE’S CAP PTY LTD (ACN 618 389 165) | Fifth Defendant |
| SANJANA BHARDWAJ | Sixth Defendant |
| - and between - | |
| BEE’S CAP PTY LTD (ACN 618 389 165) | Plaintiff by Counterclaim |
| - and - | |
| GOLD VILLAGE PTY LTD (IN LIQUIDATION) (ACN 604 255 736) | Defendant by Counterclaim |
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