Groeneveld Australia Pty Ltd ACN 070 025 795 v Wouter Nolten - [2011] FMCA 975

FEDERAL MAGISTRATES COURT OF AUSTRALIA

GROENEVELD AUSTRALIA PTY LTD ACN 070 025 795 v WOUTER NOLTEN

[2011] FMCA 975

BANKRUPTCY – Application by Respondent in the substantive proceedings to stay an application for a sequestration order.

Bankruptcy Act 1966
Supreme Court Act 1986

Adamopoulos v Olympic Airways (1990) 95 ALR 525.
Ahern v Deputy Commission of Taxation (1987) 76 ALR 137.
BP Refinery v Shire of Hastings (1977) 180 CLR 266.
Blackmagic Design Pty Ltd v Overliese [2011] 276 ALR 646.
Bresam Investments Pty Ltd & Ors v Shmee Pty Ltd & Anor [2008] VSCA 251.
Concrete Constructions (NSW) Pty Ltd v Nelson [1990] 169 CLR 594.
Esso Australia Resource Pty Ltd v Southern Pacific Petroleum [2005] VSCA 228.
Fitzwood Pty Ltd v Unique Gold Pty Ltd(in liquidation) [2001] FCA 1628.
Glentham Pty Ltd (No. 3) [2008] FMCA 284.
Groeneveld Australia Pty Ltd & Ors v Wouter Nolten & Ors (No 3) [2010] VSC 533.
Groeneveld Australia Pty Ltd & Ors v Nolten & Ors (No 4) [2011] VSC 512.
Horesh v The Sephardic Association of Victoria [2011] VSC 26.
Re Morris Walter Lewin; Roger McMillan Glasson Ex Parte: Brian John Milner [1986] FCA 128.
Jackamarra (an Infant by her next friend Jackamarra) v Krakouer and Another (1998) 153 ALR 276.
P and V Industries Pty Ltd v Portco [2006] VSC 131.
Shmee Pty Ltd & Anor and Dennis James Johnston (2008) MLG 1598.
Shmee Pty Ltd & Anor v Peter Ronald Whitaker (2008) MLG 1599.
Spotless Group Ltd v Premier Building and Consultancy Pty Ltd [2008] VSCA 115

Applicant:

GROENEVELD AUSTRALIA PTY LTD ACN 070 025 795

Respondent:

WOUTER NOLTEN

File Number:

MLG 207 of 2011

Judgment of:

Whelan FM

Hearing date:

17 November 2011

Date of Last Submission:

17 November 2011

Delivered at:

Melbourne

Delivered on:

9 December 2011

REPRESENTATION

Counsel for the Applicant:

Mr A. Strahan

Solicitors for the Applicant:

DLA Piper Australia

Counsel for the Respondent:

Mr P. Ehrlich

Solicitors for the Respondent:

Willocks Lawyers

ORDERS

The application for adjournment of the Creditor’s Petition is dismissed.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT MELBOURNE

MLG 207 of 2011

GROENEVELD AUSTRALIA PTY LTD ACN 070 025 795

Applicant

And

WOUTER NOLTEN

Respondent

REASONS FOR JUDGMENT

Introduction

This is an application by Mr Nolten, the Respondent in the substantive proceedings, to adjourn an application by Groeneveld Australia Pty Ltd, the Petitioning Creditor, for a sequestration order to be made.
The Creditor’s petition arises out of a failure by Mr Nolten to comply with a bankruptcy notice which is based on a judgment debt arising from proceedings between the parties in the Supreme Court of Victoria.

Background

Mr Nolten is the former managing director of the Applicant Petitioning Creditor. In July 2009, he was dismissed from his employment for alleged breaches of his duty as a director and employee of the Applicant. In the Supreme Court proceedings which followed, the Respondent consented to judgment with respect to some of the claims but denied others. These were the subject of the judgment given by Davies J in the Supreme Court of Victoria in November 2010.[1] The defendants in that matter were the Respondent and others, including companies described by Davis J as his “corporate alter egos”.[2]

Mr Nolten counterclaimed against the Applicant arising out of an agreement under which he exercised certain put and call options over shares in the Applicant company.
[1] Groeneveld Australia Pty Ltd & Ors v Wouter Nolten & Ors (No 3) [2010] VSC 533.
[2] Ibid at paragraphs 12 and 14.
Davies J found in favour of the Applicant on their claim and also found against the Respondent on the counterclaim. The Respondent was ordered to pay the Applicant the sum of $214,325.00. In addition, the Court ordered that various accounts be taken in relation to profits made by the Respondent or the companies described by Davies J as his corporate alter egos. Orders were subsequently made for the Respondent to pay $975,965.43 arising from those proceedings.
The Respondent was also ordered to pay “costs of the proceedings, including the costs of the counterclaim and any reserved costs . . . and the costs of proceedings SCI2009 07585 including any reserved costs”.[3] Proceedings SCI 2009 07585 were proceedings, at an earlier stage in the litigation, when search orders were obtained by the Applicant against the Respondent.
[3] Groeneveld Australia Pty Ltd & Ors v Nolten & Ors (No 4) [2011] VSC 512 at page 12.
The Respondent has not appealed against the judgment debt nor sought a stay of the orders. He has appealed against the dismissal of the counterclaim. There is a dispute between the parties, which remains unresolved concerning whether the Respondent requires special leave to appeal against the costs order made in relation to the search order proceedings.
A second Creditor’s Petition has been served by the Applicant with respect to the debt arising out of the proceedings in relation to the accounting for profits. An appeal was also lodged against that decision but is currently deemed abandoned because of a failure to comply with the relevant rules. A summons seeking an order that the second appeal not be deemed abandoned has been filed and is due to be heard on 16 December 2011.
The Respondent concedes that he has no real assets and states that he has no liabilities due and payable aside from the judgment debts owed to the Applicant.
The Applicant contends that costs in the principal proceedings and search order proceedings would together amount to some $850,000.00. The counterclaim is valued at $474,242.00 and if the Respondent was successful, it would also reduce the judgment debt by some $70,216.00.

Applicable principles

The general principles which are applicable to this application are set out by Registrar Allaway at paragraph [27] of his decision in Shmee Pty Ltd and Anor v Johnston (2008) MLG 1598 of 2008; Shmee Pty Ltd and Anor v Whitaker (2008) MLG 1599 of 2008 (“Shmee”) and I repeat them as follows:
The authorities establish the following general principles applicable to applications of this nature:
(a)     as a general rule, a court exercising jurisdiction in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceeding provided that the appeal is based on genuine and arguable grounds: Ahern v DCT (Qld) (1987) 76 ALR 137;
(b)     the mere fact that an appeal has been lodged does not, without more, give rise to a duty to adjourn the hearing of the petition: Re Flatau; Ex parte Scotch Whisky Distillers Ltd (1889) LR 22 QBD 83;
(c)     the expression genuine and arguable grounds has been interpreted variously to mean: the judgment debtor must point to grounds having a real chance of success on appeal (Re Lewin; Ex parte Milner (1986) 11 FCR 312); or that substantial reasons are given for questioning whether the debt was in truth owed (Wren v Mahony (1972) 126 CLR 212; or requiring advertence to the possibility that the appeal may be justified (Adamopoulos v Olympic Airways);
(d)     an adjournment may be refused if the appeal, although arguable, has little chance of success (Adamopoulos v Olympic Airways, Pincus J at 526). Compare though the comment by Emmett J in Farrow Mortgage Services Pty Ltd (in liquidation) v Stone [1998] FCA 884 that [e]ven if I were to conclude that the prospects of success of the appeal were not strong … I would be reluctant to deprive the Debtor of the opportunity of prosecuting the appeal if the grounds are nonetheless reasonable and arguable;
(e)     arguable in relation to an appeal means more than being able to formulate an argument which can be properly advanced; it means an appeal that might succeed: Jackamarra v Krakouer (1998) 153 ALR 276;
(f) the onus is on the applicant for an adjournment to show the existence of a genuine dispute by adducing evidence establishing the substantial nature of the appeal: Re Verma; Ex parte DCT (1984) 4 FCR 181;
(g)     the fact that a genuine and arguable appeal is extant is not the only matter to be taken into account in the exercise of the discretion. Other factors include: whether the judgment debtor is, in any event, insolvent (Farrow Mortgage Services Pty Ltd (in liquidation) v Stone); whether the appeal, if successful, would reduce the judgment debt to less than the judgment debtor’s assets (Re Lewin; Ex parte Milner); whether the prosecution of the appeal would dissipate funds which might otherwise be available to meet the judgment debt and be available to creditors in the event of a sequestration order (Farrow Mortgage Services Pty Ltd (in liquidation) v Stone).[4]
[4] (2008) MLG 1598 of 2008; MLG 1599 of 2008 at paragraph 27.

The Respondent’s submissions

The Respondent submits that the question for the Court is whether there is a genuine and arguable appeal, and if so, whether the Court should as a matter of discretion adjourn the bankruptcy proceedings pending the hearing and determination of that appeal. In this matter there is also the issue of whether the second appeal (in relation to the account of profits) having been ‘abandoned’ is likely to be reinstated.
The Respondent by reference to Williams, Civil Procedure Victoria and Jackamarra (an Infant by her next friend Jackamarra) v Krakouer and Another (1998) 153 ALR 276 (“Jackamarra”) argues not only that an appeal taken to be abandoned may nevertheless be ordered not to be so taken but that:
the bare fact that the appellant has failed to take some interlocutory step within the time fixed by the rules would not be reason enough to shut that appellant out from the pursuit of the appeal unless it was clear that the appeal would fail.[5]
[5] (1998) 153 ALR 276 at paragraph 33.
The Respondent also refers to the fact that the Court will weigh up the extent to which the appellant will be prejudiced and any prejudice to the Respondent and submits that the Applicant in this case has raised no prejudice and it should therefore be taken that no prejudice will be demonstrated at the hearing of the summons.
The Respondent further submits that Mr Nolten will consent to any application that may be made for an extension of time to prevent the petition from lapsing; that save for the judgment debts in favour of the Applicant he is solvent; that the appeal will be funded from sources other than Mr Nolten’s own resources; and that there is a freezing order which also protects the creditor from dissipation of assets.
If the appeal is genuine and arguable, the Court should then exercise its discretion in favour of the adjournment.
The Respondent submits that as a general rule, the Court should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as a foundation for the proceeding (Ahern v Deputy Commission of Taxation (1987) 76 ALR 137) (“Ahern”)).
The Respondent also relies on Adamopoulos v Olympic Airways (1990) 95 ALR 525 (“Adamopoulos”) to submit that if there is a genuine dispute, where the grounds are reasonable and arguable, or where the appeal has some chance of success the Court should not assume that the Trustee in bankruptcy will decide to pursue the appeal and that unless the adjournment is granted, a much more likely consequence of a sequestration order is that the appeal, whatever its merits, will be abandoned.
The Respondent further submits that he should not be regarded as failing to prosecute the appeal diligently because of the failure of his solicitors to attend a directions hearing. The Applicant did not seek to have the appeal dismissed and the hearing was adjourned.
The Respondent also took the Court to the decision in Glentham Pty Ltd (No. 3) [2008] FMCA 284 (“Glentham”) on the serious nature of the making of a sequestration order where a ‘genuine’ appeal is pending and to Registrar Allaway’s summary of the relevant authorities in Shmee, noting that in that matter the adjournment was granted and the appeal was subsequently upheld by the Court of Appeal.
The Respondent then dealt with the issue of the claim by the Applicant that even if he were to succeed on the appeal with respect to the counterclaim, he would still be insolvent. The Respondent submits that the quantum of the counterclaim dwarfs the judgment debt which is the subject of these proceedings.
There is no dispute that there is also a costs order against the Respondent. The form of the order is at Order 12 of the orders made on 1 December 2010.[6] The Respondent submits that there is one order as to costs, which deals with both the costs of the substantive proceedings and the search order.
[6] [2011] VSC 512 at page 12.
It is not denied that the costs of the proceeding may be reopened by the appeal. What is in dispute between the parties is whether this also applies to the search order costs. The Applicant contends that leave is required to appeal against the search costs order; that such leave will not be granted; and the Court should therefore take into account an amount of $300,000.00 estimated by the Applicant as the value of the search order costs.
The Respondent submits two things with respect to that position. First, that the estimate of $300,000.00 in taxed costs given by the Applicant’s solicitors is inadmissible opinion evidence, for which the underlying facts have not been proved. Second, both the costs of the substantive proceedings and the search order arose out of the same event. Consistently with the outcome in the proceedings, Order 12 awards costs on that basis, including the costs of the search order. If the appeal on the counterclaim is successful, Order 12 will fall and the discretion will have to be re-exercised.
The issue of whether leave was needed to appeal the costs of the search order was raised before Buchanan and Sifris JJ who determined not to resolve that dispute but to simply refer it to the Court hearing the appeal. This Court is now being asked to second guess what the Court of Appeal is likely to do, when seized of all the facts, it substantively deals with the appeal.
The Respondent submits that if he is successful on the appeal there will be a costs order in his favour and it is therefore not possible to mathematically determine with any precision what the cost consequences might be if the counterclaim is successful. Not only would the Respondent be entitled to the costs of the counterclaim and the appeal but he would also seek to rely on an open offer made on 5 August 2010 in which he offered to give up his counterclaims, other than his statutory entitlements, in respect of the re-exercising of the costs discretion.
On the issue of the merit of the counterclaim, the Respondent took the Court to the call option agreement. The Respondent had been issued some shares under the call option agreement and he put those shares to the Applicant’s parent company in accordance with the call and put option agreement. He also made another call for future shares under the agreement. The second call was not given effect to and the counterclaim seeks damages for breach of this contractual entitlement.
No application was made to set aside the call option agreement or the actual call. What was said was that the Respondent had participated in the resolution in which the shares, issued as a consequence of his call, were issued to him. What was put by the Applicant, and accepted by the trial judge, was that the Respondent had an obligation when he disclosed his interest in the share issue in the resolution, to also disclose that he was a defaulting fiduciary, and having failed to make that disclosure that the share issue could be impugned.
The Respondent, on appeal, submits that he was obliged only to disclose his interest in the share issue and the Applicant was contractually obliged to issue the shares as a consequence of the making of the call. The Respondent had no duty to disclose his past wrongdoing.
The Respondent took the Court to the decision of P and V Industries Pty Ltd and Ors v Portco and Ors [2006] VSC 131 (“P and V Industries”) which deals with the issue of the nature of fiduciary duties and the question of whether duties are proscriptive or prescriptive in nature. The Respondent submits that the decision of the judge in this matter is inconsistent with the principle as set out in the cases referred to in P and V Industries, because in effect, a prescriptive duty was imposed on the Respondent.
Further, the Respondent submits that even if the authorising resolution is set aside, he still had a vested contractual right under the call option agreement to have his shares and there was no application to set aside the agreement or the call.
In relation to the second call, the trial judge found that the Respondent could not make the second call because he was subject to the duty to avoid a conflict of interest and that by making the call he was acting in conflict. The Respondent submits that this was an error because in making the call the Respondent was acting in his personal capacity and not qua director.
The trial judge also found against the Respondent on several other grounds being misleading and deceptive conduct, deceit and breach of an implied term of ‘good faith’. The Respondent submits that arguably there was no misleading and deceptive conduct as there was no prescriptive duty to disclose and silence does not constitute misleading and deceptive conduct. Further, the conduct was not ‘in trade and commerce’ (see Concrete Constructions (NSW) Pty Ltd v Nelson [1990] 169 CLR 594 (“Concrete Constructions”); Blackmagic Design Pty Ltd v Overliese [2011] 276 ALR 646 (“Blackmagic Design”)) as the matters were entirely internal to the corporation.
The Respondent further submits that the Applicant called no evidence to suggest that the other directors drew an inference from the Respondent’s silence that he was acting lawfully. The evidence was rather that if they had known the truth they would have sacked him. There was no express representation that the Respondent was discharging his functions and responsibilities as managing director consistent with his fiduciary and statutory duties. Simply conducting oneself as if you are acting honestly and bona fide discharging your duties, remaining secret about the truth is not enough to establish misleading and deceptive conduct.
Nor was it sufficient to establish the tort of deceit. The Respondent referred the Court to Horesh v The Sephardic Association of Victoria [2011] VSC 26 (“Horesh”), a decision of Almond J, and in particular to the following:
While the actions of the defendant, not just his or her words, may convey a representation capable of sustaining a claim for deceit, mere silence, however morally wrong, will not give rise to the tort of deceit unless there is a legal or equitable duty to speak out and disclose the true facts.[7]
[7] [2011] VSC 26 at paragraph 105.
In relation to the finding of Davies J that the Respondent was in breach of an implied term as to good faith, the Respondent submits that her Honour failed to identify the content of the implied term. If there was a term, consistent with the Applicant’s allegations, it was a new contractual term, not necessary to give the agreement business efficacy and contrary to the principles set out in BP Refinery v Shire of Hastings (1977) 180 CLR 266 (“BP Refinery”). Further such a term is inconsistent with an express clause of the agreement and would have the effect of modifying that term. It is therefore inconsistent with the decision in Esso Australia Resources Pty Ltd v Southern Pacific Petroleum [2005] VSCA 228 (“Esso Australia”).
All the Respondent has to establish is that the appeal is arguable. You could not say that it is doomed to fail.
In relation to the second appeal, the Respondent argues that the Respondent cannot be jointly and severally liable for the profits received not by him but by corporate identities. Only the recipient party can be liable for an account of profits because those profits are received by them.

In the proceedings before Davies J, the Applicant contended that the judgment delivered on 22 November 2010 gave rise to a res judicata which had decided all issues of liability, including the question of joint liability. This argument was accepted by her Honour. The Respondent submits that at trial, no findings at all were made about joint liability and Davies J was in error to find that the Respondent was estopped from denying joint liability.
The Respondent argued that the fact that consent was given to some judgments on a joint and several basis does not mean that there was consent to a joint and several liability in relation to other matters. The fact that a ‘a joint list of issues in dispute’ which was prepared and submitted to the Court for the purposes of the trial was silent on the question of joint and several liability cannot be relied upon to create an estoppal of some kind.
The Respondent submits that it is arguable that in finding the Respondent was estopped from denying joint and several liability the trial judge made an error of law. Reference was also made to the pleadings and to the contents of the letter of 5 July 2010 also referred to by the trial judge.

The Applicant’s submissions

The Applicant concedes that the authorities show a bias in favour of allowing a person in the position of the Respondent to have an adjournment in order to prosecute an appeal, in circumstances where there is a real dispute about the nature of the debt that gives rise to the potential bankruptcy. In this case however the circumstances are not these. There is a debt which is outstanding, which is the debt in respect of the petition and which has not been challenged. The Respondent says nothing about the genuineness of the debt that the Applicant relies on to found its petition.
This is a long-running and significant piece of litigation. What gave rise to the initial proceedings was the discovery that the Respondent was planning to set up in competition with the Applicant and had already taken steps to do that. There was a search order obtained from Judd J to head off the risk which arose from the fact that the Respondent had already put all of the Applicant’s IT and back office functions into a company which he solely controlled. As a result of the search order, the Applicant became aware of serious dishonesty breaches of the Respondent’s duty to the Applicant over a long period.
There were a series of claims based on breaches of conduct by the Respondent involving the Respondent and companies that he controlled. Many of these were resolved before the trial because of significant concessions made by the Respondent. The counterclaim related to certain rights afforded to the Respondent by an options agreement. Those rights expired if the Respondent’s employment was to cease under prescribed circumstances, including where he commits an act of dishonesty. The question before the trial judge was whether anything had been done by the Respondent which meant that he was unable to exercise his rights under the agreement.
There were findings at the trial which led to the debt which is the subject of the petition and in addition, certain other matters were referred off for an account. The account proceedings led to a further order that the Respondent pay the Applicant $974,965.43. Davies J held in the decision, subject to the second appeal, that all issues of liability had been determined at the original trial.
The costs, with respect to the proceedings before Judd J were reserved and ultimately dealt with the Davies J as part of the orders arising from the trial. Those costs were ordered in the substantive proceeding as a related proceeding.
The Applicant produced a table setting out the Respondent’s current indebtedness, which with costs, in the Applicant’s assessment, comes to an amount in excess of $2,000,000.00. The Applicant submits that this is the context is which the Court must determine whether the application should be adjourned on the basis that if it did the Respondent would not be insolvent. In the Applicant’s submission, to reach that end would require an extraordinarily unlikely set of circumstances to transpire.
Even if the appeal on the counterclaim is successful, it is misleading to suggest that the costs order would be disturbed. The Applicant contends that the costs amount to some $550,000.00. That includes the costs of the substantive case, which is not subject to appeal, as well as the counterclaim. Even if the appeal on the counterclaim is successful, the costs will not be disturbed because the Respondent admitted dishonesty and breaching fiduciary duties and most of the costs of the trial went into proving allegations of fact which are not subject to appeal. The counterclaim was in reality a construction question. What was required to resolve it were legal arguments about some facts that had been proved as part of the claim.
The Applicant submits that even if the appeal on the counterclaim is successful, the costs of the trial would not be disturbed and there would still be a yawning gap between solvency and the Respondent’s position.
The Applicant further submits that the evidence of Mr Leggatt with respect to costs should be accepted. The actual costs as at January 2011 were $1,300,000.00. There has been another year’s worth of litigation since then.
In relation to the search order costs, the Respondent’s argument arises from the fact that Order 12 of the 1 December 2010 orders rolled up the costs of the trial and the costs of the search order proceedings.

If the Respondent does need leave to appeal the search costs order he has enormous problems because of s.17A(1)(b) of the Supreme Court Act 1986 which requires leave when a costs order is challenged without challenging the result of the proceeding itself. The principles applicable to an application for leave to appeal from a costs order were identified in Spotless Group Ltd v Premier Building and Consultancy Pty Ltd [2008] VSCA 115 (“Spotless”).
The Respondent did not seek to set aside the search orders. The Court accepted that the Applicant had shown a strong prima facie case that the Respondent had dishonestly breached his fiduciary duties. The Respondent never challenged those findings. This gives rise to a clear basis on which the trial judge was entitled to make the search costs order.
Even assuming the Respondent does not need leave, he would still need to find a reason for disturbing the trial judge’s orders. There is nothing the Respondent can point to show that even if some of the costs of the trial might be offset if he wins his appeal, the balance of the trial costs and the search order costs would not be such as to leave the Respondent in a position where he is insolvent.
The Respondent has to show both in relation to the trial costs and the search order costs that the discretion of the trial judge to order costs miscarried. These orders do not get disturbed in an ordinary sense.
The Respondent apparently contends that a ‘special costs order’ will be made in his favour based on a ‘Calderbank’ offer. The Applicant submits that at trial the Applicant beat that offer. Notwithstanding that the letter contained an offer to relinquish the counterclaim, the offer will not have any effect because it was not an offer in respect of all of the claims that the Applicant brought. It was only an offer in respect of some of them.
The Applicant further submits that a sequestration order would not stultify the appeal. The Respondent has shown that the appeal will be funded by family members. The Applicant referred the Court to Re Morris Walter Lewin; Roger McMillan Glasson Ex Parte: Brian John Milner [1986] FCA 128 at 27 (“Re Lewin”) and Bresam Investments Pty Ltd & Ors v Shmee Pty Ltd & Anor [2008] VSCA 251 (“Bresam”) at [47] to [64].
The Applicant further submits that the appeal has not been prosecuted in a timely way. There was a failure to attend a directions hearing and the second appeal now stands abandoned under the rules by reason of there having been a failure to put in an appeal book index. On their own, these would not be sufficient to constitute a basis for not exercising discretion in the Respondent’s favour but it is a matter to which the Court should have regard.
On the issue of the Respondent’s prospects of success on appeal, the Applicant submits that the Applicant was successful on several causes of action in having the counterclaim dismissed. The Court needs to be satisfied that there is an arguable appeal on all of those grounds.
The trial judge dealt with the matters raised by the Respondent in detail under the heading ‘General Law Claim’ and referred correctly to the established law on fiduciary duties. The points were agitated before her Honour and met. P and V Industries, relied upon by the Respondent, was a very different case. The trial judge referred to the decision of Finkelstein J in Fitzwood Pty Ltd v Unique Gold Pty Ltd(in liquidation) [2001] FCA 1628 (“Fitzwood”), where his Honour found that the point at which the fiduciary seeks something by way of positive gain from his position, is when the duty to disclose arises.
What is required is disclosure of the sort that allows the fiduciary to discharge the duty that would otherwise prohibit the obtaining of the gain. If the Board had known of the conduct, at the time it came to enter into the transaction to allot the shares, it would have had the opportunity to consider if it wanted to proceed with the transaction or dismiss the Respondent.
The Applicant accepts that there is a controversy about what constitutes ‘trade and commerce’ in the context of the deceptive and misleading conduct claim and that might be an appeal point.
In relation to the second appeal, the Applicant referred to that part of the judgment where Davies J found that if the Respondent had sought to dispute that he could be made jointly liable for the profits made or payments received by the corporate defendants that were attributable to his conduct as a defaulting fiduciary, he should have raised the defence at the hearing of the trial. He could have done so because joint liability was an issue in the proceedings raised by the pleadings.
Essentially having regard to the way that the trial was conducted, it was incumbent on the Respondent to raise the issue when Davies J called for a list of issues that she was required to determine. If the Respondent is not able to free himself of this liability, it will completely overwhelm him.
The Applicant submits that there is no real basis on which the Court could find that the Respondent could have all of the issues resolved in his favour. The Court should therefore not exercise its discretion to allow this to continue by adjourning the petition.

Conclusions

The Respondent seeks an adjournment of the Creditor’s Petition until such time as an appeal lodged by him against the orders of Davies J of 1 December 2010 is determined. The Applicant opposes the adjournment principally, although not exclusively, on the basis that even if the Respondent succeeds in his appeal, he is still likely to be insolvent.
This is not a simple case where the Respondent seeks to dispute the debt which forms the basis for the Creditor’s Petition. Indeed, in this matter, there is no appeal against that debt. The situation is rendered more complex by the range of matters which the Respondent would need to overcome in order to establish that he is solvent.
At present the Respondent faces the following:
a)The judgment debt on which the creditor’s petition is founded in the sum of $214,325.00.
b)An amount of $70,216.00 which is subject to the appeal.
c)Costs of:
i)The principal proceedings which the Applicant quantifies at $550,000.00; and
ii)Costs of the search order proceedings which the Applicant quantifies at $300,000.00.
d)Orders arising out of the accounting for profits in the sums of $76,213.00 which is accepted and $898,753.00 which is the subject of the second appeal.
e)Costs of the account proceedings which the Applicant estimates as $35,000.00.
The Respondent had a counterclaim in the proceedings which is admitted to be at least $474,242.00. The first appeal is substantially an appeal against the decision to dismiss the counterclaim. The Respondent will need to:
a)Win the appeal against the decision to dismiss the counterclaim on all the grounds i.e. the ‘General Law’ claim, the misleading and deceptive conduct claim, the deceit claim and the breach of implied ‘good faith’ term claim.
b)Have the costs order made in the substantive proceedings set aside and costs awarded in his favour.
c)Establish that he does not need leave to appeal against the search costs order, or convince the Court that he should be granted leave, and in either case have that order set aside.
d)Have the second appeal reinstated.
e)Win the appeal against the orders made against him arising from the account of profits and decision of Davies J of 13 October 2011.
In essence, all of these cards need to fall in favour of the Respondent, in order for him to avoid facing a debt to the Applicant which he apparently is unable to pay.
The Applicant has accepted that, as a general rule, a Court should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceeding provided the appeal is based on genuine and arguable grounds. In my view, the same should apply where the appeal is against the dismissal of a counterclaim provided the likely outcome is that the amount owed to the Debtor at the end of the process exceeds his indebtedness to the Creditor.
Various expressions have been used to refer to the benchmark of what is ‘genuine and arguable’. They range from at highest, an assessment that the appeal has ‘a real chance of success’ (Re Lewin) to ‘the possibility that the appeal may be justified’ (Adamopoulos); or that the appeal ‘might succeed’ (Jackamarra).
I have considered the arguments advanced by the Respondent in this case. I accept that there are arguable grounds particularly with the ‘good faith’ term findings and the finding that the conduct occurred ‘in trade or commerce’. With respect to the issue of whether Davies J correctly identified and applied the fiduciary obligations of the Respondent and in particular, those obligations with respect to disclosure, I am not convinced that the argument put by the Respondent is strong. Nonetheless, I accept that there may be argument which, all other things being equal, the Respondent should be allowed to run.
The difficulty I have however is in seeing how the Respondent, even if he is successful on the appeal with respect to the counterclaim, can avoid substantial costs against him with respect to the substantial success of the Applicant at trial and the search order. It is apparent that from the decision that a significant part of the trial was taken up with the evidence concerning the Applicant’s claim. Further the search order, even if the costs awarded for those proceedings cannot be separated from the trial costs, which I am not convinced cannot be done, was not challenged and the Respondent has advanced nothing save a general reference to ‘costs following the event’ to justify why that costs order should be set aside.
Even if the whole of the costs order made in the Applicant’s favour were set aside, which I consider to be most unlikely, the Respondent would in all likelihood still be indebted to the Applicant if the search order costs were to stand.
Further, the Respondent still has to establish that his second appeal should be reinstated to avoid the orders made arising from the accounting for profits which completely swamp any success in the first appeal.
The Respondent has argued that the appeal is likely to be reinstated because it would be unjust to the Respondent that the appeal be taken to be abandoned for non-compliance with the rules. The Applicant may, of course, argue that it should not be reinstated because the appeal was bound to fail.
Should the Respondent be allowed to continue, at least until the issue of whether the second appeal can proceed is determined?
The Respondent on his own admission has no assets and if the current orders stand will be indebted to the Applicant for a figure likely to exceed $2,000,000.00. He has admitted dishonesty as a fiduciary and does not contest the debt on which the Applicant brings the petition.

It is difficult to see how, even if he were to succeed in the appeal, he would be successful in convincing the Court of Appeal to set aside the costs order to the extent that his indebtedness to the Applicant would not exceed any order in his favour. In reaching that view, I have also considered the argument that the Court might award ‘special costs’ and on the material, I cannot see that this is a likely outcome.
I have also considered the Respondent’s arguments with respect to the second appeal and while the Court of Appeal may not consider the appeal to be ‘bound to fail’, it is difficult to see how the Respondent can ultimately avoid liability for profits extracted by his corporate alter egos as a direct result of his dishonesty as a fiduciary.
For these reasons, the application for adjournment of the Creditor’s Petition is dismissed.

I certify that the preceding seventy-nine (79) paragraphs are a true copy of the reasons for judgment of Whelan FM

Date: 9 December 2011