In the matter of Global Mortgage Equity Corporation Pty Limited
[2013] NSWSC 2001
•11 September 2013
Supreme Court
New South Wales
Medium Neutral Citation: In the matter of Global Mortgage Equity Corporation Pty Limited [2013] NSWSC 2001 Hearing dates: 11 September 2013 Decision date: 11 September 2013 Jurisdiction: Equity Division - Corporations List Before: Black J Decision: Leave not granted to raise new matters. Evidence given in cross-examination rejected.
Catchwords: PROCEDURE - where a party seeks to raise new matters immediately prior to commencement of hearing - where orders previously made established a timetable for evidence - whether hearing should be adjourned or split - whether allowing new matters to be raised results in prejudice to party. Legislation Cited: - Civil Procedure Act 2005 (NSW) ss 56, 57, 58
- Evidence Act 1995 (NSW) s 135Cases Cited: - Aon Risk Services Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175
- Bi v Mourad [2010] NSWCA 17
- Hans Pet Constructions v Cassar [2009] NSWCA 230
- Tomanovic v Global Mortgage Equity Corp (No 2) [2011] NSWCA 256; (2011) 86 ACSR 119Category: Interlocutory applications Parties: Zoltan Tomanovic (First Plaintiff)
Australian Financial Services Corporation Pty Limited (Second Plaintiff)
Global Mortgage Equity Corporation Pty Limited (First Defendant)
One Australia Pty Limited (Second Defendant)Representation: Counsel:
V.R. Gray (Plaintiffs)
M.B.J. Lee SC/E. Cowpe (Defendants)
Solicitors:
Corporate & Civil Legal (Plaintiffs)
Harris Friedman (Defendants)
File Number(s): 2008/282203
Judgment - ex tempore
A question arose on the first day of this hearing as to whether it is open to the Plaintiffs to rely on four matters raised in a letter dated 9 September 2013, the day before the commencement of the hearing, from the Plaintiffs' solicitor to the Defendants' solicitors which stated that:
"The set-offs under the Court of Appeal order 4(c)(ii) must bring into account in order to ascertain the "net off-sets" to which order 4(c)(ii) refers:
1. All liabilities of Mr Sayer to indemnify Mortgage House Australia Pty Ltd ("MHA") for its losses on its advances to Property Developments Australia Pty Ltd at least $7 million;
2. All remuneration paid to Mr Sayer (under any head e.g. salary, bonus, incentive, share issue, etc) since 3 July 2013 in excess of $500,000 per annum;
3. All advances made by any GMEC Group entity to Mr Sayer or any entity associated with him; and
4. Interest on all the above from the date of the application of the money under each head to the date of judgment in these proceedings at the same rates as are charged against Mr Tomanovic on the advance of $1,341,750 made to him.
It may be necessary for the Court to make orders as to liability and give directions for determination of the quantum under each head."
It is necessary to say something further as to the history of these proceedings in order to give content to the matters raised by this letter. On 18 December 2008, over four years ago, the Plaintiffs brought oppression proceedings in respect of, inter alia, Global Mortgage Equity Corporation Pty Limited ("GMEC"). On 5 March 2010, Austin J delivered judgment dismissing the proceedings. The Plaintiffs appealed from that decision and, on 4 May 2011, the Court of Appeal allowed the appeal and ordered that interests associated with Mr Sayer buy out interests associated with Mr Tomanovic on certain terms.
In particular, the Court of Appeal ordered that One Australia Pty Limited ("One Australia"), an entity associated with Mr Sayer, purchase free from encumbrances the shares owned by Australian Financial Services Corporation Pty Limited ("AFSC") in GMEC at a price equal to 45 per cent of the net value as at 30 June 2010 of GMEC, subject to two adjustments. The Court of Appeal made further orders that that valuation be, relevantly:
"(1) Undertaken by reference to the market value of the whole share capital in GMEC; and
(2) Undertaken subject to an adjustment with respect to any net liabilities of GMEC or their subsidiaries to any of Mr Sayer, One Australia, Mr Tomanovic or AFSC; and
(3) Not subject to an adjustment with respect to oppressive conduct; and
(4) Ascertained after making specified adjustments in respect of legal costs."
In explaining the basis of that order the Court of Appeal observed ([2011] NSWCA 256 at [15]-[17]; (2011) 86 ACSR 119) that interests associated with Mr Tomanovic did not oppose the orders noted in paragraphs (1) and (2) above, but had sought to limit the order in paragraph (3) to provide that the valuation should not be subject to any adjustment "with respect to the oppressive conduct alleged in the proceedings".
The Court of Appeal observed it was not appropriate to limit that order in that manner, which:
"would leave open the possibility of the Tomanovic interests contending that there had been oppressive conduct other than the conduct in issue in the proceedings that had affected the valuation. That would be, in substance, re-opening their case on oppression and seeking to put it on a wider basis."
The Plaintiffs filed a motion on 3 December 2012 seeking orders that the Court ascertain the net value of GMEC for the purposes of the Court of Appeal's orders. The Defendants subsequently filed a motion, which was ultimately not pressed, for the determination of that question by a referee.
The Plaintiffs rely on an expert report of Mr Meredith dated November 2012, which refers to one of the four issues noted above in the letter of 9 September 2013. Mr Meredith's report states that:
"Mr Tomanovic asserts that the value of his shareholding in GMEC as at 30 June 2010 was unfairly eroded by the write-off in the 2009 financial year of a debt due to GMEC of $7,387,223 by Mortgage House Developments Australia Pty Ltd (ACN 106 657 649)("MHD"). The debt reflected loan funds advanced by GMEC and its subsidiary companies to MHD at a time when Mr Tomanovic was not a director of GMEC.
Mr Tomanovic asserts that he would have objected to the advance of the loan funds by GMEC to MHD as the purpose of the advance of the funds was to enable MHD to complete a property development and that type of enterprise was non-core to GMEC's business. Therefore, it is Mr Tomanovic's view that the advance of the funds was not in the best interests of shareholders in GMEC and GMEC did not stand to gain from a successful completion of the development".
There is a second reference to that matter in Mr Meredith's report, where he notes that Mr Tomanovic suggested that a notional adjustment of $7,387,223 should be made to the value of the share capital of GMEC in determining the price to be paid to AFSC by One Australia and that Mr Meredith had not taken that matter into account, because, he observed, it had not been specifically addressed in the Court of Appeal's orders.
Mr Meredith's report in turn set out, in paragraph 2.2.3, the manner in which he considered that a valuation of GMEC was to be determined leading to an amount payable by One Australia of approximately $6.86 million based on a total value of GMEC of $12.515 million. That calculation did not include any of the four matters referred to in the 9 September letter.
On 6 May 2013, I made directions to ready the matter for hearing, including directions for the parties to serve lay evidence by 3 July 2013, to exchange any further expert evidence and to exchange documents identifying the valuation methodologies to be relied on at this hearing and (if that methodology was not supported in the relevant experts' reports) identifying the facts, matters and circumstances relied on and the outcome of that methodology. I also directed the parties exchange outlines of submissions shortly before the hearing. Importantly, I ordered that, without leave, a party could not at the hearing rely on evidence not served in accordance with those orders. The Plaintiffs thereafter filed no further lay or expert evidence.
Mr Gray, who appears for the Plaintiffs, subsequently provided an outline of opening submissions which made clear, first, that the Plaintiffs believed that the determination of the value of the shares in GMEC in the manner indicated would enable final orders to be made to conclude the proceedings and that the outcome for which they contended was a value of GMEC of not less than $12.515 million consistent with Mr Meredith's report. The approach adopted in the 9 September letter is inconsistent with those submissions, both because it would lead to a different financial outcome and because it apparently contemplates that further directions would be given and there would be, implicitly, a further hearing to deal with quantum to take into account the claim under the identified heads. The Court has previously made no direction for determination of separate issues at this hearing, and set down the matter for hearing on the basis that it would be a final hearing of the matters in dispute as to quantum between the parties, to be determined in accordance with the Court of Appeal's orders.
Mr Gray commenced his oral submissions, in opening, with the proposition that the Court would only determine the market value of the share capital of GMEC and not the relevant adjustments, because those matters would be worked out "progressively". As I have noted, that was not the basis on which the proceedings were set down for hearing before me, or, indeed, the basis of Mr Gray's opening submissions.
Mr Gray noted that the matters arising in the 9 September letter had arisen in the last forty-eight hours or so. That may not, strictly, be correct so far as at least one of those matters, which was referred to in Mr Meredith's report, had been identified as long ago as November 2012 although Mr Meredith did not take it into account in the preparation of his report. Mr Gray also submitted that the matters referred to in the 9 September letter should be dealt with at this hearing, or otherwise this hearing should be split and they should be determined later. Mr Gray submitted that those issues were material, and if the Defendants required time to respond, then that would need to occur although a long adjournment should not be required.
In further submissions, Mr Gray outlined the argument sought to be put by the Plaintiffs and the documents sought to be relied upon in a manner that elaborated upon the issues in a way in which the letter dated 9 September 2013 had not, having described them only briefly. So far as the first issue raised in that letter is concerned, Mr Gray indicated that the Plaintiffs sought to rely on a file note recording an investment in a St Peters property development, as to which the loan made was ultimately not recoverable. The Plaintiffs also sought to rely on a Subscription and Participation Agreement dated 2 July 2003, Schedule 3 of which set out the parties' rights and obligations following an investment by a third party in GMEC. Clause 4.3 of Schedule 3 provided that each of the Founding Shareholders, namely, One Australia and AFSL, indemnified GMEC and its subsidiaries (other than Excluded Companies, as defined) against loss suffered relating directly or indirectly to the Excluded Companies. I interpolate that the parties did not address, in submissions, any complexities that might arise from the fact that the provision on which the Plaintiffs rely to found a claim under the indemnity by GMEC against One Australia would also, on its face, support a claim by GMEC under the indemnity against AFSL. I need say nothing further as to that question where it was not addressed in submissions before me. The Plaintiffs also relied on a declaratory provision contained in Schedule 3 to that Agreement which provided that certain decisions would be at the risk of the persons who made them, but that is not, on its face, in the nature of an indemnity.
So far as the second matter identified in the 9 September letter, in respect of remuneration payable to Mr Sayer in excess of $500,000 per annum was concerned, Mr Gray referred to provisions in that Schedule which prohibited payments in excess of that amount without the consent of the third party investor in MEHC.
Mr Lee, who appears for the Defendants, submitted that the first time the Defendants were made aware of the additional adjustments claimed was in the letter of 9 September, the day before the hearing. Mr Lee submitted that some or all of the matters relied upon were oppressive conduct, on which the Plaintiffs were not entitled to rely by reason of the orders made by the Court of Appeal. Mr Lee also noted that the Defendants were not in a position to meet the matters now advanced by the Plaintiffs, which would require inquiries that have not been made and which, he submitted, were not open in accordance with the principles in Aon Risk Services Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175.
Mr Gray in turn made clear that, where Mr Lee had submitted that the Defendants were prejudiced, that prejudice should be explained in submissions but need not be formally proved by affidavit evidence. Mr Lee identified the relevant prejudice as that he had, for example, no instructions in respect of the claim in respect of MHA; that was hardly surprising where the only reference to that matter that is in evidence, prior to the 9 September letter, was Mr Meredith's comment that he did not address it. Mr Lee noted that, if this issue was to be raised, it should have been addressed by lay and expert evidence filed by the Plaintiffs in accordance with my earlier directions; and submitted that there would be prejudice to the Defendants in respect of further delay in determination of the proceedings, if they were now adjourned or if this hearing was in some way split.
With this somewhat lengthy background, I turn now to the question whether I should order either an adjournment of this aspect of the proceedings, or in some way split the hearing of this aspect of the proceedings, so as to permit the Plaintiffs to agitate the four matters referred to in the letter dated 9 September 2013. I formulate the question that I must determine in that way because the Defendants, by senior counsel, have as I have noted, indicated they would be prejudiced by being required to deal with this matter at this hearing, have identified the basis on which that prejudice arises and Mr Gray has not required formal proof of that matter once it has been explained in submissions. It seems to me that the prejudice to which the Defendants refer is real. First, they would have to identify how the claims advanced in the 9 September letter are said to arise and what facts, matters and circumstances underlie them. The Plaintiffs' formulation of the matters in that letter was brief and unparticularised, although Mr Gray has to some extent elaborated on it in oral submissions as I have noted. The Plaintiffs have not, for example, served Points of Claim and the manner in which the claim has been formulated appears to leave open both factual and legal issues, such as the question how the asserted liability to indemnify GMEC is to be accounted for if both One Australia and AFSL have given the relevant indemnity; what is the remuneration (including the specified heads) for which the Plaintiffs contend under paragraph 2, over the ten year period to which that paragraph refers; what are the advances and associated entities referred to in paragraph 3; and what is the basis of an entitlement to interest under paragraph 4, and why it is at the same rate as charged against Mr Tomanovic on the advances referred to.
If the Defendants were able to identify the basis of those claims, on the information presently available to them, they would then have to identify any lay and expert evidence required to address them and prepare that evidence, including evidence as to how any such adjustment was required to be undertaken in the relevant valuations. Once it is accepted that there is prejudice to the Defendants from addressing this matter in the hearing, then it can only be addressed if this hearing were adjourned or in some way split to allow them an opportunity to address those issues in an orderly way.
A question then arises as to whether the relevant claims are open under the orders made by the Court of Appeal and Mr Lee contended that they were not. Neither he nor Mr Gray put submissions as to whether the relevant claims gave rise to "liabilities" within the meaning of order 4(c)(ii) of the Court of Appeal's order, which may turn on whether it was intended to refer only to crystallised liabilities, or to extend so far as claims that had neither been advanced nor determined by the date at which the valuation was to occur. Where that matter was not addressed in submissions, I do not consider it necessary for me to address it.
Turning now to the first claim, which relates to the asserted liability of Mr Sayer to indemnify GMEC for losses on an advance in respect of the St Peters development of at least $7 million that claim was put in the 9 September letter as a set-off of liability under order 4(c)(ii) made by the Court of Appeal, Mr Gray also formulated the claim in oral submissions as relevant to the net value of GMEC's shares as at 30 June 2010. It seems to me that the better view is, as Mr Lee contends, that claim is not, in fact, open to the Plaintiffs because it is, as Mr Meredith's record of the manner in which Mr Tomanovic puts it makes clear, in substance a claim that Mr Sayer caused GMEC to enter into a transaction to which Mr Tomanovic would have objected which was not in the interests of the GMEC's shareholders. Such a claim, if established, would be oppressive conduct, even if the Plaintiffs now refrain from attaching that characterisation to it, and adjustments with respect to it would be adjustments with respect to oppressive conduct expressly excluded by paragraph 4(c)(iii) of the Court of Appeal's order. That exclusion seems to me to have priority over the reference to an adjustment for liabilities under paragraph 4(c)(ii) and to apply to conduct that is oppressive, as a matter of substance, whether or not the Plaintiffs advance that characterisation. If the Court of Appeal's orders were not read in that manner, the exclusion in respect of oppressive conduct in paragraph 4(c)(iii) could be rendered nugatory, and the Plaintiffs could re-open the case in the manner which the Court of Appeal expressly rejected, by re-characterising any conduct that would otherwise be excluded as oppressive as a different claim, for example, as a claim for breach of directors' duties or, in this case, as a claim under indemnity. While I have expressed a preliminary view as to this issue, I ultimately do not consider it necessary for me to finally determine it, for reasons that will emerge below. I should add that I note the Plaintiffs do not seek leave to lead lay or expert evidence as to this question, having regard to the directions that were previously made by the Court, although it is perhaps difficult to see that the claim could be established without such evidence.
The second matter identified in the letter of 9 September is a claim for remuneration paid to Mr Sayer in excess of $500,000 per annum over ten years from 3 July 2003 to date, where the required approval of the third party shareholder had not been obtained. I note there is presently no evidence as to whether such approval had been obtained or not. Even if the Plaintiffs could establish that such approval was not obtained, it seems to me, at a preliminary level, that the payment of excessive remuneration without the required approval of a shareholder would also properly be characterised as oppressive conduct, could have been raised at the trial before Austin J and would be excluded by order 4(c)(iii) made by the Court of Appeal. Again, I do not consider that I need to reach a final view as to that matter for reasons that I will note below.
The third matter identified in that letter relates to advances made to Mr Sayer or entities associated with him. Mr Gray did not elaborate on this claim, or identify evidence to support it, in oral submissions.
Again, it is difficult to see how the second and third matters could be established without lay or expert evidence, which was not filed in accordance with the Court's directions, and which the Plaintiffs do not now seek leave to file.
The fourth claim, as to interest on the above claims, is consequential and it is also difficult to see how the basis of that interest could be established without lay or expert evidence, again not filed in accordance with the Court's directions, as to which leave is again not sought now to file it.
Ultimately, it seems to me that this matter is capable of being determined on a narrower basis, having regard to the question whether this hearing should now be adjourned or split. The decision in Aon, to which Mr Lee referred, emphasised that the Court must have regard to, among other matters, the prejudice arising from delay arising in matters of this nature, a matter which is also emphasised in Bi v Mourad [2010] NSWCA 17. I should have regard more broadly to s 56 of the Civil Procedure Act 2005 (NSW) which provides that the overriding purpose of the Act and the Rules of Court, in their application to civil proceedings, is to facilitate the just, quick and cheap resolution of the real issue in dispute in the proceedings. The Court is required to give effect to that overriding purpose when it exercises any powers given to it by the Act or by the Rules of Court. Section 58 in turn requires the Court, in deciding whether to make any order for direction for the management of proceedings, to act in accordance with the dictates of justice.
For the purposes of determining what are the dictates of justice in a particular case the Court must have regard to the provisions of ss 56 and 57 and may have regard to specified matters, including the degree of expedition with which the respective parties have approached the proceedings, the degree to which they have been timely in their interlocutory activities, the use which they have made, or could have made, of any opportunity available to them in the Courts in the course of proceedings and the degree of injustice that will be suffered by the respective parties as a consequence of any order or direction. Section 57 in turn requires the Court to have regard to other specified matters, including the just determination of the proceedings, the efficient disposal of the Court's business, the efficient use of available judicial administrative resources and the timely disposal of the proceedings and all other proceedings in the Court, at a cost affordable by the respective parties.
These provisions were considered by the Court of Appeal in Hans Pet Constructions v Cassar [2009] NSWCA 230. Although the parties did not refer to that case in submissions, no doubt because of the short notice at which this issue arose, I consider that I may properly refer to since it is a leading authority as to the operation of the relevant sections. Allsop P there observed at [36] that these provisions bring about:
"A new statutory balance among factors in litigation including Court and party efficiency and the delivery of individual justice.
Delay and case backlog are not merely matters affecting the public cost in delivering of justice, they corrode the ability of the Courts to provide individual justice...the reforms that have taken place under the Civil Procedure Act...can thus be seen not merely to reflect worthy governmental and judicial efforts for efficiency, but also to be vital for the provision of timely individual justice.
To these salutary ends, the significant powers of case management have been placed in the hands of judicial officers which, if exercised, can often be seen to have sharp, and sometimes detrimental effects on the claims of the parties."
His Honour also emphasised that the terms and importance of ss 56 to 58 should be borne in mind as I have done when exercising these powers.
I will proceed on the basis that the matters raised may have significance for the Plaintiffs' claim, as Mr Gray contends. At least so far as the claim under the indemnity is concerned, and subject to the complexity that both founding shareholders have given it, the amount of indemnity suggests that that proposition is correct. That does not altogether assist the Plaintiffs, because it highlights the question why, if that was so, these matters had not been raised previously (other than for Mr Meredith's indication that he had not addressed one of them), or in anything but the most general terms in the 9 September letter. The Plaintiffs offer no explanation of the failure to raise these matters until the day before the hearing. No affidavit evidence was lead by Mr Tomanovic or his solicitors. When I raised the matter with Mr Gray in oral submissions, he observed that:
"The only response I can make to your Honour is that ideally with the advantage of hindsight it could and should have been done."
That is not, in my view, a substantive explanation for failure to raise these matters, at least one of which was addressed in Mr Meredith's report by an indication that it was not in fact addressed.
I have had regard, on the one hand, to the potential injustice to the Tomanovic interests from being deprived of the opportunity to agitate these four issues; I have, on the other hand, also had regard to the fact that they have had the opportunity to identify these issues and lead evidence as to them in accordance with the directions made by the Court, as well as in the proceedings at first instance before Austin J, and that it could not be suggested that raising the issue on the day before the commencement of this hearing involved either expedition or a use of the opportunity available from the directions which the Court had previously made for the filing of evidence.
The prejudice to the Defendants seems to me, as I have noted, to be real. At the least, a split hearing as to damages would be required. Mr Sayer, who has already been cross-examined, would potentially have to lead further evidence and be cross-examined for a second time. Further expert evidence may well be required, as noted above, and if leave were granted to lead it, then the experts who are shortly to be cross-examined in respect of their existing reports would then have to prepare further reports and have to be cross-examined further in respect of their further reports. Further legal costs would be incurred and judgment would be delayed. Mr Gray responds that the matter has already been on foot since 2008 and a short further delay would make no real difference; but the time for which the proceedings have been on foot to date seems to me to be more, rather than less, reason to be concerned as to delays at this point. I accept Mr Lee's submission that there is a real prejudice to the Sayer interests in these claims continuing to subsist over the business, in which they are to be ordered to acquire the remaining shares. Further, and more widely, the decision in Hans Pet Constructions, to which I have referred above, emphasises that delay gives rise not only to prejudice to the parties, but to delivery of justice generally, and that is a matter to which I give substantial weight.
For all these reasons, I would not grant leave to the Plaintiffs to raise these matters, to the extent that such leave is required, but, perhaps as a matter of greater practical significance, I would not order that the proceedings be adjourned or that issues in them be split. In these circumstances, the prejudice which has already been identified by the Defendants is likely to be determinative in respect of any attempt to lead evidence of the kind to which the Plaintiffs have referred.
I, therefore, reject the evidence given by Mr Sayer in cross-examination which was previously admitted on a provisional basis pending delivery of this judgment, for lack of relevance and under s 135 of the Evidence Act 1995 (NSW).
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Decision last updated: 23 January 2014
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