In the matter of The Summit Hotel Bondi Beach Pty Ltd (No 2)

[2023] NSWSC 487

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of The Summit Hotel Bondi Beach Pty Ltd (No 2) [2023] NSWSC 487

Hearing dates:

10 and 15 March 2023, 5 April 2023

Decision date:

09 May 2023

Jurisdiction:

Equity - Corporations List

Before:

Robb J

Decision:

The Court will make orders substantially in the form of the offer made by the second, fourth and fifth defendants in the revised short minutes of order that they provided to the Court, including that the order sought in prayer 1 of the interlocutory process contain a $10 million carveout: see [82]-[84] below.

See [187]-[202] below for issues that must be addressed that are relevant to the formulation of the orders to be made by the Court to give effect to these reasons.

See [208] below as to the costs of the application on the interlocutory process.

The parties are invited to confer for the purpose of agreeing short minutes of order to give effect to these reasons, and in the absence of agreement to request the Associate to Robb J to relist the matter for further submissions.

Catchwords:

CIVIL PROCEDURE — interim preservation — freezing orders — against third parties — where shareholder seeks freezing order against third party company — where defendants consent subject to a carveout to pay company’s liabilities — where secured undertaking offered

Legislation Cited:

Civil Procedure Act 2005 (NSW), s 3(1)

Corporations Act 2001 (Cth), ss 232, 233, 234(a), 461(1), Part 2F.1A

Limitation Act 1969 (NSW), s 54

Supreme Court Act 1970 (NSW), s 66

Uniform Civil Procedure Rules 2005 (NSW), rr 25.3, 25.11, 25.14

Cases Cited:

Apostolidis v Kalenik (2011) 35 VR 563; [2011] VSCA 307

Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57; [2006] HCA 46

Australian Securities and Investments Corporation v Letten (No 10) [2011] FCA 498

BCI Finances Pty Ltd (in liq) v Binetter (No 3) [2015] FCA 1336

Bloc (ACT) Pty Ltd v Crafted Capitol Pty Ltd [2021] ACTSC 81

Caboche v Southern Equities Corporation Ltd [2001] SASC 55

Cardile v LED Builders Pty Ltd (1999) 198 CLR 380; [1999] HCA 18

Davis v Turning Properties Pty Ltd [2005] NSWSC 742; (2005) 222 ALR 676

Deputy Commissioner of Taxation v Huang [2021] HCA 43; (2021) 395 ALR 616

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360

Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672

Hylepin Pty Ltd v Doshay Pty Ltd [2020] FCA 1370; (2020) 148 ACSR 30

In the matter of Bicher & Son Pty Ltd [2020] NSWSC 711

In the matter of C & L Cameron Pty Ltd – GB Gazzana v Nadalan Enterprises Pty Ltd; AF Gazzana v Nadalan Enterprises Pty Ltd [2012] NSWSC 676

In the matter of HPack Investments Pty Ltd [2020] NSWSC 1638; (2020) 149 ACSR 303

In the matter of The Summit Hotel Bondi Beach Pty Ltd [2023] NSWSC 295

Lawfund Australia Pty Ltd v Lawfund Leasing Pty Ltd [2008] NSWSC 144; (2008) 66 ACSR 1

Myers v Design Inc (International) Ltd [2003] EWHC 103 (Ch); [2003] 1 WLR 1642

National Australia Bank Ltd v Human Group Pty Ltd (No 2) [2020] NSWSC 1900

Newcastle City Council v Caverstock Group Pty Ltd [2008] NSWCA 249

Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR; [1998] HCA 30

Petar v Macedonian Orthodox Community Church St Petka Inc (No 2) [2007] NSWCA 142

PT Bayan Resources TBK v BCBC Singapore Pte Ltd (2015) 258 CLR 1; [2015] HCA 36

Ratul v Islam;In the matter of Australian Real Estate Relation Pty Ltd [2023] NSWSC 78

Sayed v Hemat [2011] WASC 183

Texts Cited:

P Biscoe, Freezing and Search Orders (3rd ed, 2023, LexisNexis)

Practice Note SC Gen 14

Practice Note SC Gen 16

RP Austin and AJ Black, Austin & Black’sAnnotations to the Corporations Act (LexisNexis)

Category:

Procedural rulings

Parties:

Efrem Harkham (First Plaintiff)
10-12 Campbell Parade Pty Ltd (Second Plaintiff)
The Summit Hotel Bondi Beach Pty Ltd (First Defendant)
HK Empire Pty Ltd (Second Defendant)
Patglen Pty Ltd (Third Defendant)
Terry Harkham (Fourth Defendant)
Geraldine Harkham (Fifth Defendant)

Representation:

Counsel:
GA Sirtes SC/PD Reynolds (Plaintiffs)
DR Sulan SC/L Rich (Second, Fourth and Fifth Defendant)
J Whealing (First and Third Defendant)

Solicitors:
Assured Legal Solutions (Plaintiffs)
Jones Day (Second, Fourth and Fifth Defendant)
Norton Rose Fulbright (First and Third Defendant)

File Number(s):

2022/00372454

Publication restriction:

Nil

JUDGMENT

1. On 15 February 2023, the plaintiffs filed an interlocutory process seeking freezing orders, or injunctive relief, requiring that the net proceeds of sale of four properties that were owned by the corporate defendants be held on trust until further order of the Court, or pending the determination of these proceedings.

The parties

2. The plaintiffs are Efrem Harkham and 10-12 Campbell Parade Pty Ltd (Campbell Co), the first and second plaintiffs respectively. For reasons that will shortly appear, Efrem Harkham is the only plaintiff who has a direct interest in the issues that remain in contention between the parties. Where I refer below to relief being sought by the plaintiffs, it will often strictly only involve a claim being made by Efrem.

3. The active defendants are the second defendant, a company called HK Empire Pty Ltd (HK Empire), the fourth defendant, Terry Harkham, who is Efrem's brother, and the fifth defendant, Geraldine Harkham, who is Terry's wife. As Terry and Geraldine Harkham are the only defendants who contest the outstanding issues, I will refer to them as the "defendants".

4. As the individual parties are members of the Harkham family, I will, with no disrespect intended, refer to them by their first names.

5. The companies who are or were the owners of the subject properties are as follows:

1. The first defendant, The Summit Hotel Bondi Beach Pty Ltd (SHBB), was the owner of 2-8 Campbell Parade, Bondi Beach (2-8 Campbell Parade), which is the subject of prayer 1 of the interlocutory process.

2. Campbell Co and HK Empire were the owners of 10-12 Campbell Parade, Bondi Beach (10-12 Campbell Parade), which is the subject of prayer 2 of the interlocutory process.

3. The third defendant, Patglen Pty Ltd (Patglen), purchased Shop 1, XX Reservoir Street, Surry Hills and XXX-XXXX Pitt Street, Haymarket, which are the subjects of prayer 3 of the interlocutory process.

6. SHBB and Patglen are companies in which Efrem, Terry and Geraldine are shareholders and directors. They were represented at the hearing of the interlocutory application by their solicitor, who appeared only to ensure that SHBB received the benefit of an order that I have made that will enable it to pay capital gains tax that it owes in respect of the sale of 2-8 Campbell Parade.

7. Campbell Co is owned by Efrem and HK Empire is owned by Terry. It is not necessary for the purposes of these reasons to provide any further information concerning Patglen or Campbell Co and HK Empire, or the basis upon which the latter two parties held their interests in 10-12 Campbell Parade, as the parties to the proceedings have in substance agreed concerning the interlocutory orders that should be made in response to prayers 2 and 3 of the interlocutory process. As will be seen, the primary issue arises in relation to SHBB and the interlocutory orders that should be made concerning the proceeds of sale of 2-8 Campbell Parade.

The first judgment

8. The initial hearing of the application took place on 10 and 15 March 2023. The defendants made an application for leave to cross-examine Efrem. I published reasons for judgment on that application on 29 March 2023: In the matter of The Summit Hotel Bondi Beach Pty Ltd [2023] NSWSC 295 (the first judgment or J). I gave the defendant leave to cross-examine Efrem on certain issues, see J [45] where I found:

[45] Accordingly, I will grant the defendants leave to cross-examine Efrem limited to his awareness of the transactions that the plaintiffs seek to impugn in these proceedings, relating only to loans or other liabilities in the accounts of SHBB.

9. The cross-examination took place on 5 April 2023 and the hearing of the application was completed on that date.

Outline of the plaintiffs’ allegations

10. I set out at J [14], an outline of the plaintiffs' claims in these proceedings. Following is a synopsis of the circumstances alleged by the plaintiffs.

11. As noted, Efrem and Terry are brothers. From about 1978, Efrem and Terry were parties to one or more arrangements that the plaintiffs described as “quasi-partnerships”. Another brother, Uri, was also a member of some of the quasi-partnerships. He sold out his interests to Efrem and Terry in about 2012. It is not necessary for the Court to refer to Uri’s involvement further, save to note that one of Efrem’s claims is that Terry has failed to cause half of Uri’s one third shareholding in Patglen to be registered in the name of Efrem.

12. The plaintiffs allege that the essence of the quasi-partnerships was that Efrem and Terry would invest on a long-term basis in commercial and residential real estate in Sydney through corporate vehicles in which they would each have equality of shareholding and control. Relevantly, SHBB and Patglen were the corporate vehicles. As Efrem moved permanently to the United States, it was agreed between the brothers that Terry would have the day-to-day management of the quasi-partnerships’ investments. The brothers conducted the management of the companies informally by regular telephone conversations that occurred about fortnightly. Formal directors’ meetings were not held and directors’ resolutions were not made or recorded. Efrem relied upon Terry to inform him of any significant developments or change in plans for the quasi-partnerships. Efrem reposed implicit trust in Terry.

13. In fact, the plaintiffs allege, when Terry caused SHBB to be incorporated, he issued one third of its shares to each of Efrem, Terry and Geraldine. He caused Efrem, Terry and Geraldine to be appointed as its directors. Terry also caused Geraldine to be appointed as a director of Patglen with Efrem and Terry. These steps were taken without Efrem’s knowledge or consent. The plaintiffs allege that Terry caused SHBB, in particular, to act as a “treasury” for himself, Geraldine, his family and associated entities. This led to substantial amounts of SHBB’s funds being paid out to those interests. Terry and Geraldine also caused SHBB to engage in investments that were outside the parameters agreed when the quasi-partnerships were formed. These steps were unauthorised by Efrem and were not disclosed to him. When Efrem discovered these matters, there was a falling out between the brothers. Efrem through his solicitors sought to be provided with financial information to enable him to determine how the quasi-partnerships had in fact been operated. Terry has provided information to Efrem in response to the requests but the plaintiffs say the response has been substantially incomplete.

14. The brothers agreed to cause the four properties referred to in the interlocutory process to be sold. The plaintiffs commenced these proceedings by originating process filed on 9 December 2022. The parties were subsequently ordered to proceed on pleadings.

Relief claimed by the plaintiffs

15. I outlined the relief sought by the plaintiffs, by reference to the relevant paragraphs of the statement of claim, at J [14(27)], which I will now repeat for convenience:

(27)   On the basis of the facts alleged in the statement of claim, Efrem seeks orders:

(a)   that Terry account to him for breach of fiduciary duty: [248], [249];

(b) for relief for oppression under s 233 of the Corporations Act 2001 (Cth): [250]-[254];

(c) for the winding up of SHBB and Patglen by operation of ss 233(1)(a), 461(1)(e), (f), (g) and (k) of the Corporations Act [255]-[261]; and

(d)   that Efrem owns half of the shares in SHBB or that Geraldine holds half of her shares in SHBB on trust for Efrem on the basis of an estoppel [262]-[266].

16. I add that I now realise that my summary omitted a claim made by Efrem that he is also entitled to half of the shares in Patglen, because Terry has failed to cause half of the one third of the shares in that company that were originally issued to Uri to be registered in Efrem’s name after the brothers equally bought out Uri.

17. The first claim made by the plaintiffs is for breach by Terry of fiduciary duties arising under an alleged quasi-partnership between Efrem and Terry (leaving aside the position of Uri) that they would invest on a long-term basis in commercial and residential real estate to be held in particular through the companies that became registered as SHBB and Patglen: see Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, as explained in Lawfund Australia Pty Ltd v Lawfund Leasing Pty Ltd [2008] NSWSC 144; (2008) 66 ACSR 1 at [22] (Brereton J).

18. The relief sought in respect of this claim is set out in the amended statement of claim at par 249. That relief primarily takes the form of an order that Terry account to Efrem for such assets and other profits that he, his family and other parties associated with him have received by virtue of his alleged breaches of the fiduciary duties.

19. In par 249(c), the plaintiffs also claim an entitlement to an order that Terry "is not entitled to enforce as against SHBB, Patglen or the Quasi Partnership liabilities purported owed to him by the same procured from his breaches of the Fiduciary Duties". It is not clear what the basis of this further claim is. There are no liabilities that Terry has sought to enforce against the alleged quasi-partnership. Terry does claim that SHBB is indebted to him

20. The plaintiffs dealt with Efrem’s claim for relief for breach by Terry of the alleged fiduciary duties arising out of the quasi-partnerships in their written submissions at par 155. The only relief that the plaintiffs asserted that Efrem had a good arguable case to receive was that Terry account to Efrem. The written submissions do not support a claim for an order in the terms set out in par 249(c) of the amended statement of claim.

21. If Efrem succeeds in this claim, an order will be made that Terry give an account to Efrem. At the end of that process, the Court may make an order against Terry that he pay to Efrem such amount as is found to be payable to Efrem on the balance of the account. That will be a money judgment against Terry. It is presently impossible to forecast whether such an order will be made, or what its quantum will be.

22. The plaintiffs apply for an order for the winding up of SHBB and Patglen on two grounds. The first is what is still commonly called an "oppression claim" made under s 234(a) and s 233 of the Corporations Act 2001 (Cth). The plaintiffs claim that the manner in which Terry and Geraldine managed the affairs of SHBB and Patglen, as summarised at [13] above, had the consequence that their conduct satisfied a number of the grounds set out in s 232 for the Court to make an order for the winding up of the companies.

23. The second ground for the winding up of SHBB and Patglen relied upon by the plaintiffs is pursuant to s 461(1)(e)-(g) and (k) of the Corporations Act. In substance, this application is made upon the same factual basis as I have summarised above as the basis for the oppression suit. The primary aspect of this claim may be that the circumstances justify the Court in forming the opinion that it is just and equitable that the companies be wound up within the meaning of s 461(1)(k).

24. It is notable that the plaintiffs have not sought an order in favour of Efrem under Part 2F.1A of the Corporations Act that he be given leave to commence derivative proceedings on behalf of SHBB and Patglen against Terry and Geraldine for alleged breaches of duties that they owed to the companies as their directors. The plaintiffs do not apply for relief that the appointment of Geraldine as a director of the companies was invalid. They do not seek declarations that any of the transactions of which the plaintiffs complain were invalid. They do not seek orders that Terry and Geraldine restore any property to the companies that they, or their associates, acquired as a result of alleged breaches of duty that they owed to the companies.

25. Thus, the plaintiffs’ claim that Terry should be ordered to account to Efrem for breach of fiduciary duty is made on the basis that the benefits gained by Terry of which the plaintiffs complain remain valid. The plaintiffs seek to recover Efrem’s share of those benefits through the remedy of an account. It would be inconsistent with this remedial approach for the prospective winding up of the companies to be analysed on the basis that it is possible that any liquidator who is appointed will seek to recover property from Terry on behalf of the companies.

26. As explained in the plaintiffs' written submissions, at par 161, the relief sought by the plaintiffs as a consequence of the alleged oppressive conduct is, in addition to the winding up of the companies, an order for a buyout, an account of profits or the taking of accounts.

27. Finally, the plaintiffs seek to establish that Efrem is entitled beneficially to 50% of the shares in each of SHBB and Patglen, and consequential relief to cause him to be registered as the holder of those shares.

Interlocutory relief sought

28. Prayer 1 of the interlocutory process seeks the following relief:

This application is made under the Court’s inherent jurisdiction, s 66 of the Supreme Court Act 1970 (NSW), rule 25.3, 25.11 and/or 25.14 of the Uniform Civil Procedure Rules 2005 (NSW).

On the facts stated in the supporting affidavit(s), the applicants, Efrem Harkham and 10-12 Campbell Parade Pty Ltd, apply for the following relief:

1.   In respect of the monies paid by the purchaser for the property situated at 2-8 Campbell Parade, Bondi Beach, NSW 2026 (First Property) including the deposit paid and the monies paid on settlement together with any interest that has accrued (First Settlement Proceeds), upon the Plaintiffs giving the usual undertaking as to damages, until further order:

a.   the First Settlement Proceeds are to remain in [name and number of account stated], to be held on trust pending the determination of these proceedings;

b.   the First Defendant, Fourth Defendant and Fifth Defendant are restrained from taking any step that causes the First Settlement Proceeds to be disposed of, diminished, transferred, spent, charged, pledged, encumbered or otherwise dealt with (in whole or in part) in the absence of a prior written consent signed by both the First Plaintiff and the Fourth Defendant or their respective nominees (in respect of which, the nomination must be in writing).

29. Prayer 1 took this form because the contract for the sale of 2-8 Campbell Parade had been completed and the net proceeds of sale were held in a solicitor’s controlled monies account. Prayer 2 was in equivalent terms in respect of the sale by Campbell Co and HK Empire of 10-12 Campbell Parade. Prayer 3 was formulated in terms that would have the same effect after the completion of the contracts for sale of the two properties owned by Patglen.

30. The subject matter of the orders sought by prayers 1 to 3 of the interlocutory process is in each case money held, or to be held, by solicitors on trust for one or more of the four corporate parties. In each case part (a) of the order has the effect that the relevant corporate party or parties must leave the money in the relevant controlled monies account until the determination of these proceedings. Part (b) restrains Terry and Geraldine and the relevant corporate party or parties from dealing with the money in the manner stated, without the prior written consent of Efrem and Terry.

31. The plaintiffs do not seek freezing orders against Terry and Geraldine in respect of their own assets. SHBB and Patglen are passive parties to these proceedings, who have been joined as they are proper parties to the plaintiffs’ application for orders that they be wound up. They are third parties to the plaintiffs’ claim against Terry. This is a relevant consideration for the purpose of the principles that govern the making of freezing orders.

Defendants’ response to the interlocutory process

32. The defendants contested the strength of the plaintiffs' interlocutory claim, but also offered a secured undertaking directed at protecting the plaintiffs, pending the final determination of the proceedings.

The proposed $10 million carveout

33. In essence, the defendants offered to consent to interlocutory orders that would have the effect that the proceeds of sale of all of the four properties would be held on trust pending the outcome of these proceedings or further order, subject to a carveout of $10 million from the restraint sought in prayer 1 of the interlocutory process, that would permit Terry and Geraldine to cause SHBB to repay debts to entities associated with Terry, with Terry and Geraldine providing an undertaking, secured by a mortgage over their residential property, to indemnify SHBB to the extent that it is determined by the Court that the entities associated with Terry were not entitled to receive the repayments.

34. The terms of the initial carveout sought by the defendants is set out at J [4]. If made, that order would have permitted Terry and Geraldine to cause SHBB to repay any of the debts owed by SHBB to any of the creditors described as “Terry and the Terry Related Entities”, up to a total of $10 million. The Terry Related Entities are described at J [5], and, as stated in the Schedule to the defendants’ proposed short minutes of order (omitting ACNs), are:

1.    Lulubelle Pty Ltd

2.   Tonale Pty Ltd   

3.   Hark Education Pty Ltd

4.   Hark Investments Pty Ltd as trustee for the Foundation Trust

5.   Foundation Education Holdings Pty Ltd.

6.   Lulubelle Pty Ltd as trustee for the T & G Harkham SMSF

7.   ACPE Holdings Pty Ltd

8.   Geraldine Harkham

35. Following the completion of the interlocutory hearing, the defendants provided revised short minutes of the orders that they asked the Court to make. Order 1 of the revised short minutes of order, which provides for the carveout sought by the defendants, is in the following terms:

Without admission by any party and upon the Plaintiffs giving the Court the usual undertaking as to damages, and providing the undertaking to the Court set out in order 7 below, the Court orders that:

1.   In respect of the monies paid by the purchaser to the First Defendant (SHBB) for the property situated at 2-8 Campbell Parade, Bondi Beach, NSW 2026, (First Property) which are held in the Macquarie Bank controlled monies account in the name of [name and number of accounts stated] (SHBB RK Trust Account), until further order or the conclusion of these proceedings (whichever is the earlier):

(a)   subject to the mortgage referred to in Order 4(c) below being registered, $10,000,000 from the SHBB RK Trust Account is to be paid to SHBB, for the purposes of SHBB repaying amounts it owes (as reflected on the accounts of SHBB) to the Fourth Defendant (Terry Harkham) and/or the Terry Related Entities (as defined in Schedule 1 to these orders);

(b)   subject to orders 4 to 6 below, the balance remaining in the SHBB RK Trust Account are to continue to be held in trust in the SHBB RK Trust Account.

36. It will be noted that, as did the equivalent order in the initial draft short minutes of order, order 1(a) would permit Terry and Geraldine to cause SHBB to repay any debts reflected in its accounts owed to Terry or the Terry Related Entities up to a total of $10 million. In this respect, the revised order 1(a) is in the same terms as the original order.

37. This makes relevant a change in the defendants' evidence and the way they presented their case at the final hearing, that is not reflected in the revised draft order 1(a). On the final day of the interlocutory hearing, the defendants sought to read an affidavit of their solicitor, Roger Dobson, that was sworn on 3 April 2023 (the new Dobson affidavit). Senior counsel for the plaintiffs informed the Court that the affidavit was served at 7:16 PM on the Monday before the final day of the interlocutory hearing that took place on the Wednesday. I will explain the Court's rulings concerning the leave given to the defendants to read parts of this affidavit below. For the present, the relevant aspect of the new Dobson affidavit is the statement in pars 12 to 13 that, as at the date of the affidavit, Terry had informed Mr Dobson that the Terry Related Entity called Lulubelle Pty Ltd (Lulubelle) was owed $12,867,497.24 by SHBB, and, if the $10 million carveout is permitted by the Court "the entire amount will be paid to Lulubelle in partial satisfaction of the outstanding balance referred to".

38. It was my perception on the final day of the interlocutory hearing that the application proceeded on the basis that the defendants only sought the $10 million carveout on a narrower basis than the original application, being that only Lulubelle would be repaid $10 million of the debt recorded in SHBB's accounts as being owed to that company. It seems clear from the observations made by senior counsel for the plaintiffs, at T 39.25, that the plaintiffs were of the same understanding. Given the limited time that the parties had available, it seemed to me to be clear that the parties only focused on the evidence concerning the dealings between SHBB and Lulubelle.

39. Accordingly, I expected that, when I received the revised proposed short minutes of order, order 1(a) would have been amended to limit the permitted repayments to repayments of the debt recorded in SHBB's accounts as being owed to Lulubelle up to a maximum of $10 million. I will return to this issue when I consider the terms of the orders that should be made on the interlocutory process.

The secured indemnity offered by Terry and Geraldine

40. The terms of the secured indemnity, as originally offered by Terry and Geraldine, are set out at J [7]. The revised proposed order 4 is now in the following terms:

4.   Subject to these orders, or any further order of the Court, the Fourth Defendant and Fifth Defendant undertake:

(a)   that they will not dispose of, deal with, encumber or alienate [the Vaucluse Property] prior to the conclusion of these proceedings without giving 14 days’ notice in writing to the Plaintiffs;

(b) to indemnify the First Defendant for the value of the repayments referred to in Order ‎1(a) plus interest (that is, up to $10 million plus interest accrued at the current “benchmark interest rate” under Division 7A of Part III of the Income Tax Assessment Act 1936 being 4.77% pa) to the extent that it is determined at the conclusion of these proceedings that Terry Harkham and/or the Terry Related Entities were not entitled to receive those repayments;

(c)   to provide a mortgage to SHBB over the Vaucluse Property with a maximum liability of $10 million to secure the indemnity referred to in order 4(b) above, and to take all necessary steps to ensure the mortgage is registered;

(d)   that they will not take any step prior to the conclusion of these proceedings that causes the:

(i)   monies in the SHBB RK Trust Account, 10-12 RK Trust Account and Patglen RK Trust Account, to be disposed of, diminished, transferred, spent, charged, pledged, encumbered or otherwise dealt with (in whole or in part);

(ii)   SHBB to release the mortgage referred to in order ‎4(c) above,

in the absence of a prior written consent signed by both the First Plaintiff and the Fourth Defendant or their respective nominees (in respect of which, the nomination must be in writing).

41. The property that I have described as the Vaucluse property is unencumbered and has a value determined by valuation evidence of more than twice the amount of the carveout sought by the defendants. There is no need to disclose the value of the Vaucluse property in these reasons.

42. When read with the revised order 1(a), SHBB would not be permitted to repay any debt as part of the carveout until the mortgage referred to in order 4(c) has been registered. That change was apparently made in accordance with a suggestion made by the Court that the plaintiffs should be protected by the registration of the mortgage. Order 4(b) has been revised to accommodate another suggestion made by the Court, that the indemnity should extend to interest at an appropriate rate in respect of the portion of the $10 million carveout that is applied in the repayment of a debt.

Response of the plaintiffs to the defendants’ proposal

43. As noted at J [8], the plaintiffs rejected the offer made by the defendants in the original version of their proposed short minutes of order. The plaintiffs made a counter-proposal that would permit SHBB to pay $2.1 million of liabilities recorded in its financial statements as being owed to Terry and the Terry Related Entities. As I understand it, that was on the basis that the smaller carveout would be protected by the secured indemnity to be granted by Terry and Geraldine.

44. The plaintiffs maintained this position on the final day of the interlocutory hearing. They submitted that a carveout of $10 million was not justifiable and was too large, having regard to the proportion that the amount of $10 million bore to the total amount of the net assets of SHBB that the evidence showed would be available, after the satisfaction of its liabilities, to be distributed to its shareholders.

45. The plaintiffs made submissions concerning the deficiencies in the secured indemnity offered by Terry and Geraldine, in order to counteract the defendants’ claim that the balance of convenience clearly favoured the Court making the orders in the revised proposed short minutes of order, because the plaintiffs would be completely protected by the secured indemnity. I will consider the plaintiffs’ objections to the terms in which the defendants formulated the secured indemnity when I deal with the terms of the orders that should be made on the interlocutory process.

The undertaking by Efrem to secure the usual undertaking as to damages

46. In the conventional way, the revised proposed short minutes of order submitted by the defendants required the plaintiffs to give to the Court the usual undertaking as to damages. Although the evidence in a general way suggests that Efrem is a man of considerable wealth, he is a resident of the United States of America. Although, on any view of the outcome of the principal proceedings, Efrem will be entitled to a substantial proportion of the balance that will be retained of the proceeds of sale of the four properties that will be held on trust pending the outcome of the proceedings, there remains the possibility that Efrem could deal with his interest in those funds, and SHBB and Patglen more generally, in a manner that undermined the value to the defendants of Efrem's usual undertaking as to damages. The defendants therefore submitted that Efrem should be required to provide some security to support the undertaking as to damages. The defendants included order 7, which is in the following terms:

7.   The First Plaintiff undertakes to the Court that, prior to the conclusion of these proceedings or until further order, he will not:

(a)   call upon, pledge, charge, encumber, or otherwise deal with, any equity or other entitlement he may have in the First Defendant or the Third Defendant (including in relation to any loan owed to him); and/or

(b)   seek to cause the First Defendant or Third Defendant to make a payment to him in respect of his equity or any other entitlement he may have in relation to the First Defendant or Third Defendant (including in relation to any loan owed to him).

The First Plaintiff acknowledges that this undertaking is provided in support of the undertaking as to damages provided by the First and Second Plaintiffs in these orders.

47. I accept that it will be appropriate for the plaintiffs to be required to provide an undertaking by Efrem to support their undertaking as to damages generally in the form of proposed order 7. As I understand the plaintiffs’ position, as found in their version of the short minutes of order that should be made by the Court that was provided after the completion of the hearing, Efrem has agreed to secure his undertaking as to damages in the manner proposed by the defendants.

The remaining interlocutory issues

48. The only remaining substantive issue on the interlocutory application is whether the Court should make an order substantially in the terms of prayer 1 of the interlocutory process, or whether the Court should make that order subject to a carveout as sought by the defendants. If a carveout is authorised, there is a question whether it should be for the $10 million sought by the defendants or some smaller amount.

49. Given the evidence that the defendants now only seek the carveout to permit SHBB to partially repay a debt recorded in its financial statements as being owed to Lulubelle, it is no longer necessary for the Court to consider the circumstances of Patglen, or the circumstances in which SHBB may be indebted to Terry or the Terry Related Entities other than Lulubelle.

50. I will deal with issues that have arisen concerning the formulation of the orders to be made by the Court separately below.

The admissibility of Mr Dobson’s new affidavit

51. It is necessary to deal with a number of preliminary issues before I return to the question of what orders should be made on this interlocutory application.

52. First, I will explain the Court's reserved ruling concerning the defendants' application for leave to read Mr Dobson's new affidavit. The rulings are summarised at T 35.29. I gave the defendants leave to read pars 40 to 44, which contained evidence on information and belief from Geraldine that Terry and Geraldine had made enquiry of their bank as to whether the bank would lend Terry and Geraldine $10 million on the security of the Vaucluse property, as an alternative means of funding their cash requirements, as set out in J [43]. The evidence was that, for reasons that need not be related, the bank was unwilling to provide that finance.

53. I declined to give leave to the defendants to read pars 31 to 37 of the new Dobson affidavit, the relevance of which was explained to the Court as being evidence of the sale of other properties that had led to Efrem receiving distributions of his interests in those properties. I was not satisfied that it was sufficiently material to the outcome of the interlocutory application, given the late service of the affidavit, that the plaintiffs were seeking to restrain distributions from the sale of some properties when they had enjoyed distributions from the sale of other properties. I also declined the defendants leave to read paragraphs 38 and 39 of Mr Dobson's affidavit, which did little more than augment the evidence that had already been received by the Court in par 26 of Mr Dobson's original affidavit concerning the defendants' need for the $10 million carveout, which is set out at J [43]. That evidence had not been answered by the plaintiffs and there was insufficient justification for the defendants to be permitted to augment that evidence.

54. The defendants then withdrew their application to read pars 15 to 37 of Mr Dobson's new affidavit, so it is not necessary to refer further to the content of those paragraphs.

55. The only outstanding issue is whether the defendants should be given leave to read pars 10 to 14 inclusive of Mr Dobson's new affidavit (the defendants having withdrawn the application for leave to read that part of par 12 after the first sentence). The parts of the affidavit that the defendants pressed were stated by Mr Dobson on information and belief from Terry. Paragraph 10 explained in broad terms the basis upon which Terry and the Terry Related Entities had made advances to SHBB over a period of at least 9 years, including that transactions were always accounted for by journal entry, loans were repayable on demand, loans were repayable by SHBB when it had available capital, the loans to SHBB were funded from the assets of Terry or the Terry Related Entities, and that over the years Lulubelle was the main lender to SHBB. Paragraph 11 contained an outline explanation of the business of Lulubelle in historical terms. I have already mentioned the content of pars 12 and 13 above, concerning the amount of the debt owed by SHBB to Lulubelle and the intention that the whole of the $10 million carveout would be applied to the partial repayment of the debt owed by SHBB to Lulubelle.

56. Paragraph 14 provided a general explanation of how SHBB used advances made to it by Lulubelle in the following terms:

14. Terry has informed me that the loans from Lulubelle to SHBB were provided for the purposes of funding the various investments undertaken by SHBB over the years, and funding operating losses and expenses incurred by SHBB. Terry has also informed me that this has included funding:

(a) losses in relation to the upkeep of 2-8 Campbell Parade, in circumstances where the yearly rent received on that property often did not cover the yearly expenses arising to maintain the building, including ongoing fire safety costs and building improvements;

(b) expenses and losses relating to SHBB's 100% ownership of Malicom, (SHBB holds 1 ordinary share, which is the only share on issue), which owns the Inkerman Street property referred to in my First Affidavit;

(c) expenses and losses relating to SHBB's 50% ownership of Metropole (SHBB holds 5 of the 10 shares on issue), which owns the property at Gang Gang Street referred to in my First Affidavit;

(d) SHBB's 100% ownership of Tova Bella (SHBB holds all 17,071,600 shares on issue); and

(e) SHBB's share trading investment activity.

57. As a result of the limited time available to properly determine the issue of whether leave should be granted to the defendants to read pars 10 to 14, I ruled that the issue would be dealt with in these reasons for judgment. That was in part because I was unable in the time available to determine the extent which the generally worded evidence in these paragraphs was only a verbal explanation of the substantial quantity of documentary evidence that had already been received as an exhibit to Mr Dobson's first affidavit.

58. Having had the opportunity to reflect on the defendants' application, I have decided to give the defendants leave to read this aspect of Mr Dobson's new affidavit. I accept the submission of senior counsel for the defendants that this evidence is solely within the knowledge of the defendants, so that it is unlikely that the plaintiffs would have been able to provide any reply, if they had had greater notice of Mr Dobson's new affidavit. Furthermore, the evidence is in general terms and provides a broad explanation of SHBB's activities concerning its borrowings from Lulubelle, which I consider is necessary to provide the Court a more sound foundation than it otherwise would have had to consider the practical and financial significance of the carveout sought by the defendants.

59. The last issue that must be addressed in relation to Mr Dobson's new affidavit arises out of that part of par 12 that the defendants ultimately did not seek to read. That part of the affidavit was in the following terms:

12.… A bundle of documents relating to this Lulubelle debt, focusing on a sample period by way of example being the financial years ending 30 June 2015 and 30 June 2016, appears at pages 5 to 38 of the Defendants' Supplementary Tender Bundle. Those documents include ledgers and bank statements which show payment of money by Lulubelle to SHBB. I have caused the relevant transactions in the ledgers and bank statements to be highlighted in blue.

60. The evident intent of this evidence was to demonstrate on a sample basis how the final debt of $12,867,497.24 had been accumulated by a process of payments between Lulubelle and SHBB. The evidence only demonstrated the dates and amounts of payments and repayments, and accordingly gave an indication of the pattern of transactions as between the two companies.

61. The parts of the Defendants' Supplementary Tender Bundle (STB) that the defendants pressed for tender, being pages 1 to 4, 270 to 271, and 277 to 294 were admitted into evidence as Exhibit D2. I allowed senior counsel for the plaintiffs to reserve the right to tender parts of the STB that were not ultimately tendered by the defendants. However, as the plaintiffs may have tendered only a selection of the STB, I reserved the right to the defendants to apply to tender further parts of the STB, if they thought that the selective tender of documents by the plaintiffs justified that course. I observed that if the plaintiffs' tender was sufficiently extensive, the result might be that the Court should receive all of the documents in the STB that the defendants had not initially sought to tender: see T 36.42.

60. In the result, the plaintiffs tendered pages 19 to 35 of the STB, which were admitted into evidence without objection as Exhibit P2. That tender took place as the last event in the hearing of the interlocutory application, after the time when the Court would ordinarily have reserved judgment. As it has happened, the defendants were not given the opportunity to consider the effect of the tender by the plaintiffs, or to exercise their leave to tender other related parts of the STB.

61. A review of pages 5 to 38 of the STB (as explained in the part of par 12 of Mr Dobson's new affidavit that was not read) shows that it consists of SHBB's general ledger for its loan from Lulubelle for the year ended 30 June 2015 (STB, p 5) and the same document for the financial year ended 30 June 2016 (STB, p 27). Pages 6 to 26 of the STB are bank statements of SHBB and Lulubelle that support the 30 June 2015 general ledger and pages 28 to 35 are equivalent documents that support the 30 June 2016 general ledger. As explained in the part of par 12 of Mr Dobson's affidavit that was not read, relevant transactions in the ledgers and bank statements were highlighted in blue.

62. The effect of the plaintiffs including pages 19 to 35 of the STB in Exhibit P2 is that the 30 June 2016 general ledger and all supporting documents are now in evidence, but only pages 19 to 26 of the documents supporting the 30 June 2015 general ledger are in evidence, and that general ledger and the remaining documents in support are not in evidence.

63. In these circumstances, I have decided that fairness and common sense require the Court to add pages 5 to 18 to Exhibit D2. The effect will only be to complete the partial tender of pages 19 to 26 and make the effect of that evidence reasonably intelligible.

The cross-examination of Efrem

66. As noted above, the defendants were given leave to cross-examine Efrem, limited to his awareness of the transactions that the plaintiffs seek to impugn in these proceedings, relating only to loans or other liabilities in the accounts of SHBB. The relevant issue was whether, in fact, Efrem was aware of transactions that Terry and Geraldine caused SHBB to enter, when Efrem’s evidence was that he had no knowledge of the transactions and they were entered into by SHBB without his consent or authority.

67. The thrust of the cross-examination of Efrem by senior counsel for the defendant was to direct his attention to accounting information supplied to Efrem (as attachments to emails addressed to Efrem's assistants) that were copied to Efrem for the purpose of the preparation of Efrem's US tax returns. Relevantly, the cross-examination commenced by the following exchange: T 5.10-5.25

Q. So it was important for [Efrem’s assistant] and your accountants to get that Australian information and to review it, for the purposes of preparing your US tax returns. That's what you understood was happening, correct?

A. Correct.

Q. You yourself would review the information, because you were the person submitting the tax returns?

A. Is that a question?

Q. Yes.

A. Actually, I may have perused the documents. I have no recollection of it, but my job was to pass it on. A lot of my emails were - all my emails, hundreds of emails daily - would be sifted through by my assistant, whoever it was at the time, and they would pass it on. They would know that our job was to pass it on to the accounting firm ASAP. So, there was - we all knew our marching orders.

68. Efrem accepted that he had received emails addressed to his staff that were copied to him that attached balance sheets or draft balance sheets for SHBB for the years 2013 to 2016 that specified the amount of the debt owed by SHBB to Lulubelle at the balance date. Efrem also accepted that the accounting information was incorporated in his US tax returns, specifically for the 2011 and 2012 years. The financial information included in the tax return was in the form "Loans from shareholders and other related persons" and specified the total of all such debts.

69. Broadly, the position adopted by Efrem was that he could not remember reading the financial information that was put to him in cross-examination at the time he received the emails. The financial information was generally received late, and was immediately forwarded to Efrem's accountants for the purpose of compiling his US tax returns against impending deadlines.

70. It is fair to say that Efrem volunteered the following explanation of his treatment of the financial information that was provided to him concerning the affairs of SHBB: T 17.48-18.23

A. … So, what I'd ask you to accept is that the figure that you've signed up to and provided to the US tax department as representing the liability position of SHBB includes these loans as loans from other shareholders, and related persons. Do you accept that?

A. You know I had no idea about these loans. I didn't understand them, I did not know what they meant. Terry never asked me about his incurring these loans. So, this is just a matter of trust that I look through these documents, I forwarded them on, but I didn't even look at them. My team knew, my account - that I trusted Terry implicitly. That there was no way that there was going to be any shenanigans. My share structure was perfect, and that my - that he was protecting my operations, to my benefit. A hundred percent to my benefit and a hundred percent to his benefit. So, there's never a question. So, to take me back and ask me if I remember these loans, I don't remember these loans, and now looking at them - yeah. It's just I was never consulted about these loans, I never knew about these loans. I was not consulted about these loans. We need loans, we need money. I never heard that, there was never a meeting requesting that. It just appears, and then we would take it to the account, we forward it immediately to the accountant, and they make whatever sense they make of it. But they know that I trust Terry completely. They know that there's nothing that he could do wrong, that we are 50/50 partners unless [Uri] was involved in that piece of real estate. That's how they perceived it, that's how I perceived it all those years. So, I'm sorry I deviated, but I'm trying to answer your question. I don't recall these loans, no.

71. Further, Efrem volunteered: T 22.28-22.32

WITNESS: What I wanted to say, that I kind of mentioned it earlier, that I trusted Terry's information. I - there was no questioning. My team knew of my my deep connection to Terry, my trust of Terry, so you have to keep that in mind when you're saying that I knew about the numbers. I knew that Terry knew and I trusted Terry. He was like - he was my other half.

72. Senior counsel for the defendants cross-examined Efrem about the accuracy of the evidence given by Efrem in par 31 of his affidavit in which Efrem had said: “… I sporadically received documentation regarding the performance of the properties and the companies. On infrequent occasions, Terry sent faxes of financial statements such as profit and loss statements for Patglen and SHBB. I cannot recall specifically what I received and when.” See T 23.15-23.40:

Q. … If one can go to 79 of the Court book. Do you see in the final two sentences, that you refer to only receiving sporadic documentation and getting financial statements on infrequent occasions. Do you see that?

A. Yes, I do.

Q. You would accept that that statement in your affidavit in light of the material I've shown you, is incorrect, wouldn't you?

A. No, I would not. I would not consider that incorrect.

Q. You maintain your evidence that you received sporadic information on an infrequent occasion. Is that your honest answer to this Court?

A. Absolutely. We were forever chasing him for information.

Q. Well that's just not true, is it Mr Harkham?

A. Of course it's true. I would not lie. It was - it was pulling teeth to get information from Terry and his company, in order for us to do the right thin[g] in the USA. That was our main focus. The Australian financial statements were pretty..(not transcribable).. always there was never a dividend, there was never - never - never any share played over it. It was never - it was so poor. So it really didn't mean anything. It was $100,000 loss, $100,000 gain year after year. So it really did not - it was not - he

Q. I'll give you one more opportunity, Mr Harkham. Do you stand by the statements in paragraph 31 of your affidavit?

A. Absolutely, I stand by it.

The credibility of the evidence given by Efrem

73. Senior counsel for the defendants made the following oral submissions concerning the credibility of the evidence given by Efrem: T 53.26-53.35

He was plainly a witness that was not giving in effect straightforward answers to questions from the cross-examiner, he was seeking to in effect propagate or propound his case theory to your Honour constantly and he was trying to distance himself from documents which he didn't put in his affidavit, which he plainly had access to, and for whatever reason chose not to, and paragraph 31 of the affidavit is to his complete discredit. When your Honour goes to that part of his affidavit and looks at [it], your Honour cannot reconcile that with the material that I showed him in cross-examination, and when I gave him an opportunity to depart from that and to correct it, he chose not to. That is to his discredit.

74. I do not make any negative finding on this interlocutory application concerning the credibility of the evidence given by Efrem in cross-examination. Efrem gave his evidence in difficult circumstances. The cross-examination took place remotely when Efrem was in Jerusalem and it was 3 AM in the morning. It lasted about one and a half hours. The process whereby the documents upon which Efrem was cross-examined were displayed on his computer screen was not seamless and, to my observation, Efrem experienced some difficulty in identifying relevant parts of the documents. Nonetheless, I am satisfied that Efrem generally gave direct and candid answers to the questions that he was asked. Although the evidence concerning Efrem's business interests was limited, it seems likely that his statement that he received hundreds of emails daily that were required to be vetted by his staff was correct. I am also prepared to accept that Efrem probably relied upon his accountants to prepare his US tax returns accurately, and given their length of over 100 pages, it is probable that he did not examine them minutely before he signed them.

75. Senior counsel for the defendants submitted that the Court ought not accept the evidence given by Efrem in cross-examination concerning his evidence in par 31 of his affidavit. The suggestion made was that it was plainly false for Efrem to say that he only received sporadic information on infrequent occasions from Terry concerning the financial circumstances of the Australian companies. That suggestion was made because the evidence suggested that, in fact, Efrem received financial statements from the companies regularly, each year in order to enable him to arrange for the preparation of his US tax returns. While I accept that there is some force in the submission that it was false to characterise regular, annual provision of financial statements as being sporadic and infrequent, this, in my view, is a debatable issue that should not be determined on this interlocutory application.

76. It would, in any event, be inappropriate for the Court to make findings concerning the credibility of Efrem's evidence given that he personally affirmed an affidavit in support of the plaintiffs’ application, and Terry and Geraldine provided their evidence behind the shield of Mr Dobson's affidavits given on information and belief.

77. At the end of the day, the issue is no clearer as to whether Efrem took the trouble to examine the balance sheets of SHBB, or the other companies, with which he was provided, or whether he took the trouble of informing himself of the financial affairs of those companies.

78. It is usually thought to be unwise for witnesses to volunteer information in cross-examination that is not responsive to the questions that they are asked. Time will tell whether the information volunteered by Efrem that I have set out above, will advance the plaintiffs' case at the final hearing.

Purpose of the carveout

79. Terry’s need for funds, and indeed the reason why the defendants have sought the carveout, is as stated in the evidence given by Mr Dobson and set out at J [43]. For convenience I will repeat that part of the first judgment:

[43] The evidence relied upon by the defendants concerning their need for SHBB to be permitted to satisfy the liabilities contemplated by proposed order 1(a) is in my view relevant to whether they should be given leave to cross-examine Efrem on the issue of his awareness of the loan transactions. That evidence is given at [26] of the defendants’ solicitor’s 7 March 2023 affidavit in the following terms:

[26] I am informed by Terry that he requires access to the funds to be released pursuant to the Interim Proposal to pay for living expenses, loan obligations, legal and professional service fees (including those being incurred in relation to the two USA proceedings referred to in paragraph 11 above) and other expenses and operating costs associated with the other properties and investments that Terry owns or controls. I am informed by Terry, and believe, that he does not otherwise have access to cash (as opposed to other assets which would have to be sold or encumbered) to fund these expenses and that he was depending on the receipt of the proceeds of sale from the Bondi Properties to provide him with funds to meet these expenses. Without limitation, I am informed by Terry that this includes:

(a)   approximately $400,000 required by Terry to fund a townhouse development project in Katoomba in respect of which Terry has an interest;

(b)   approximately $500,000 required by Terry for a development project in Victoria which is due over the next month, with a further obligation of $200,000 payable for subdivision and infrastructure works later in the year;

(c)   approximately $500,000-$1,000,000 required by Terry for renovation works to a motel in Echo Point planned to commence in July 2023 in respect of which Terry has an interest; and

(d)   approximately $4,800,000 payable by Terry in the final quarter of 2023 to fund the commencement of construction of a development project in Katoomba in respect of which Terry has in [sic] interest.

80. Terry and Geraldine have not been able to obtain alternative finance by means of a borrowing from their bank on the security of a mortgage over the Vaucluse property to satisfy Terry’s continuing need for funds pending the determination of these proceedings.

81. Terry is likely to suffer significant loss if the Court makes freezing orders that prevents him from having access to the funds that Lulubelle will receive from a partial repayment of the debt recorded in the financial statements of SHBB as being owed to Lulubelle.

Outcome of application

82. I agree with the defendants’ submission that the offer of the secured indemnity by Terry and Geraldine fully negates the need or justification for an unqualified order in the terms of prayer 1 of the interlocutory process. I consider that the offer of the secured indemnity was a reasonable response by the defendants to the interlocutory process, that should have foreclosed the need for further judicial determination after the offer was made, as it extinguished any real risk that the assets of SHBB that may otherwise have been available to satisfy any orders made by the Court in favour of the plaintiffs would have been dissipated.

83. I agree with the observation made by senior counsel for the defendants that the Court’s acceptance of the defendants’ position was “the short way home”: T 49.5. However, the plaintiffs did not accept the defendants’ offer and have put in issue various matters that have required the Court’s consideration. The reasons that follow explain why I do not accept the plaintiffs’ submission that all of the freezing orders that they seek should be made on an unqualified basis. They also explain why I do not accept that any carveout that is made to the freezing order sought in prayer 1 of the interlocutory process should be substantially less than the $10 million sought by the defendants. In fact, I consider that the plaintiffs have not established a strong case for the making of freezing orders. It is not necessary to consider whether the application for freezing orders would have been dismissed in the absence of the offer made by the defendants. The making of that offer has had the effect that the Court has accepted that the carveout should be in the sum of $10 million without the defendants having to justify that amount with a detailed explanation.

84. The result is that the Court will make orders substantially in the form of the short minutes of order proposed by the defendants.

Consideration

85. The issue is whether the Court should make unqualified orders substantially in the form of prayers 1 to 3 of the interlocutory process, as sought by the plaintiffs, or whether the Court should accept the offer made by the defendants and make orders in terms of prayers 2 and 3, but make the order in terms of prayer 1 subject to the $10 million carveout sought by the defendants, on the basis that the plaintiffs will be protected by the secured indemnity offered by Terry and Geraldine.

86. The appropriate place for the Court to start is to identify the source of the Court's powers to make the orders sought by the plaintiffs.

87. The interlocutory process states that the application is made under the Court's inherent jurisdiction, s 66 of the Supreme Court Act 1970 (NSW) and rr 25.3, 25.11 and/or 25.14 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR).

UCPR r 25.3

88. It will be convenient to first consider the plaintiffs’ reliance upon UCPR r 25.3 as the source of the Court’s jurisdiction to make the interlocutory orders that they seek. Rule 25.3 of the UCPR provides:

25.3 Preservation of property

(1)    In proceedings concerning property, or in which any question may arise as to property, the court may make orders for the detention, custody or preservation of the property.

(2)    An order under subrule (1) may authorise any person to enter any land or to do any other thing for the purpose of giving effect to the order.

(3)    In proceedings concerning the right of any party to a fund, the court may order that the fund be paid into court or otherwise secured.

89. The defendants took issue with the entitlement of the plaintiffs to rely upon this rule, on the ground that none of the plaintiffs had a proprietary interest in the funds that are or will be held on trust for SHBB or Patglen, relying upon the judgment of Spigelman CJ in Newcastle City Council v Caverstock Group Pty Ltd [2008] NSWCA 249 at [29]-[32], where the Chief Justice (with whom Bell JA and Handley AJA agreed) accepted a number of observations made by Lightman J in Myers v Design Inc (International) Ltd [2003] EWHC 103 (Ch); [2003] 1 WLR 1642 (at [10]-[12]), including that a rule with equivalent effect to r 25.3 is only applicable where there is a fund in which the applicant for interlocutory relief has a proprietary interest.

90. It is clear that the test to be applied in determining whether the interlocutory relief sought should be granted differs depending on whether the claim to the relevant funds is proprietary or non-proprietary. As Ward J (as her Honour then was) said in In the matter of C & L Cameron Pty Ltd – GB Gazzana v Nadalan Enterprises Pty Ltd; AF Gazzana v Nadalan Enterprises Pty Ltd [2012] NSWSC 676:

[191] Although the Amended Notice of Motion specifically invokes only r 25.14 of the Uniform Civil Procedure Rules, in the course of submissions the applications by Nadalan Enterprises to restrain the payment out of the moneys to the Gazzana brothers were identified as being based on Rules 25.3 and 25.15 as well as 25.14(b). Those Rules deal, respectively, with applications to preserve a fund in respect of which a proprietary interest is claimed and applications for freezing orders.

[192] There is a distinction between the two circumstances, as noted in A v C (No 1) [1981] 1 QB 956, by Robert Goff J, as his Lordship then was, and as recognised by Lloyd J in PCW (Underwriting Agencies) Ltd v Dixon [1983] 2 All ER 158 and by Brereton J in Badman v Drake [2008] NSWSC 968.

[193] The purpose of an injunction of the former kind is to preserve a specific fund, which is the subject matter of the proceedings, not to prevent the dissipation of assets out of which a judgment debt might ultimately be met. As Brereton J noted in Badman, the basis of the distinction between the two types of case is that in the first the concern is that, absent a preservation order, the very subject matter of the proceedings might be dissipated before the hearing and equity would then have been invoked in vain (or, as was said in PCW, quoting Templeman LJ in an earlier case, “it is the concern of any court of equity to see that the stable door is locked before the horse has gone”). Whereas in the latter type of case (where the claim is not to a proprietary interest in a specific fund) the concern is as to abuse of the court’s process. (For the distinction between a claim for a Mareva injunction and an injunction in aid of a proprietary claim, Brereton J in Badman also referred to Australian Receivables Ltd v Tekitu Pty Ltd [2008] NSWSC 433, at [28] and McCleary v Bullabidgee Pty Ltd [2008] NSWSC 534, at [5]).)

[194] What must be established for such relief must, therefore, take into account the purpose for which the relief is sought. In this case of preservation of an asset over which a proprietary interest is claimed, one is looking to the identification of the specific fund and whether there is a serious question be tried as to the interest claimed in that fund (as well as to the adequacy of damages and the balance of convenience). In the case of an application for a freezing order, one looks to whether there is a reasonable apprehension of dissipation or removal of assets or use of the dispositive power so as to frustrate or abuse the process of the court.

91. The property the subject of the interlocutory relief sought by the plaintiffs is the property of the relevant company. Efrem, as a shareholder in SHBB and Patglen, does not have an interest in the property of those companies. Efrem has not applied to the Court for leave to institute derivative proceedings in the names of the companies. He is not prosecuting the companies’ claims. (It is not necessary to separately consider the position of Campbell Co in respect of prayer 2 of the interlocutory process).

92. The plaintiffs stated in pars 139 and 140 of their written submissions that their application for orders restraining dealings with the proceeds of sale of the four properties broadly proceeded on two bases. The first involved orders in the nature of a freezing order to preserve the dissipation of the proceeds of sale and the second involved orders in the nature of an injunction or asset preservation order to preserve the subject matter of the proceedings. The plaintiffs only addressed the issue of whether the interlocutory orders that they sought could be made as conventional interlocutory injunctions briefly at the end of their submissions in pars 179 to 182.

93. Although the plaintiffs said that they were seeking asset preservation orders to preserve the subject matter of the proceedings, they did not explain why Efrem was able to treat the property of the companies in which he is a shareholder as property in which he has a proprietary interest. The plaintiffs’ written submissions, at pars 142 and 143, only make reference to rr 25.11 and 25.14 (that is, to rules governing freezing rather than asset preservation orders under the UCPR), and do not address the question of the plaintiffs’ proprietary interest in the property the subject of proposed order 1. The plaintiffs’ submissions on the request for an interlocutory inunction are limited to pars 179-182 and do not directly address this point.

94. I accept the defendants’ submission that the plaintiffs’ have not established that they have a proprietary interest in the fund when considered in light of the relief sought in the originating process as outlined at [15]-[27] above: see T 48.5-48.48, and that the plaintiffs’ claim for interlocutory relief in this case is not supported by the application of UCPR r 25.3.

Interlocutory injunction

95. I now turn to the potential application of s 66 of the Supreme Court Act, which enacts the Court’s statutory power to issue injunctions, including interlocutory injunctions.

96. In par 140 of their written submissions, the plaintiffs confirmed that they applied for an order in the nature of an injunction, and they made brief submissions in support of that application at pars 179 to 182. The question therefore is whether, in this context, the Court can restrain the companies dealing with the funds representing the net proceeds of sale of their properties that are presently held on trust by issuing an interlocutory injunction. If the Court has that power, then the Court must proceed as stated in Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57; [2006] HCA 46, where Gummow and Hayne JJ said (footnotes omitted):

[65] The relevant principles in Australia are those explained in Beecham Group Ltd v Bristol Laboratories Pty Ltd. This Court (Kitto, Taylor, Menzies and Owen JJ) said that on such applications the court addresses itself to two main inquiries and continued:

“The first is whether the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief … The second inquiry is … whether the inconvenience or injury which the plaintiff would be likely to suffer if an injunction were refused outweighs or is outweighed by the injury which the defendant would suffer if an injunction were granted.”

By using the phrase “prima facie case”, their Honours did not mean that the plaintiff must show that it is more probable than not that at trial the plaintiff will succeed; it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial. That this was the sense in which the Court was referring to the notion of a prima facie case is apparent from an observation to that effect made by Kitto J in the course of argument. With reference to the first inquiry, the Court continued, in a statement of central importance for this appeal:

“How strong the probability needs to be depends, no doubt, upon the nature of the rights [the plaintiff] asserts and the practical consequences likely to flow from the order he seeks.”

97. If the Court were entitled to proceed upon that basis, then the first issue would be whether the plaintiffs have established a serious question to be tried that Efrem has a seriously arguable right to prevent the companies dealing with the funds held on trust for them. The Court would then assess whether the balance of convenience favoured the issue of the interlocutory injunction or not. Frequent experience demonstrates that the threshold for a claimant for an interlocutory injunction to establish a serious question to be tried is often relatively low.

98. In the present case, as I have noted above, Efrem has not sought the Court's leave to commence derivative proceedings in the name of any of the companies to restrain Terry and Geraldine wrongfully dealing with the property of the companies in breach of their duties as directors. Consequently, the plaintiffs are not seeking on an interlocutory basis an order to restrain conduct that they seek to restrain on a final basis in these proceedings. In reality, they are not seeking an interlocutory injunction at all, but only freezing orders to protect other relief that they seek that does not concern dealings by the companies with the funds that are held on trust for them.

99. The plaintiffs seek relief for Efrem on the ground that the manner in which Terry and Geraldine have conducted the affairs of SHBB and Patglen involves oppression, so that a remedy may be available under Part 2F.1 of the Corporations Act. The plaintiffs have not alleged that any of the transactions that they claim involved oppressive conduct ought to be set aside. The plaintiffs have not relied upon the observation made by the learned authors of Austin & Black’sAnnotations to the Corporations Act (LexisNexis) at [2F.233], where it is said: “The court has jurisdiction to make an interlocutory order such as an interim injunction in proceedings brought under Pt 2F.1 [being ss 232-235], on the usual grounds that there is a seriously arguable case for final relief and the balance of convenience favours the making of the order”. The plaintiffs have not justified the interlocutory relief they have sought on the basis that it should be granted as a conventional interlocutory injunction to support their claim under Part 2F.1 of the Corporations Act.

Freezing order

100. Although an application for a freezing order may be determined on an interlocutory basis, the order is not a conventional interlocutory injunction, and should not be equated to such an order: Cardile v LED Builders Pty Ltd (1999) 198 CLR 380; [1999] HCA 18 (Cardile) at [26] and [42]. It is not sufficient for the applicant to establish that there is a real case to be tried on the claim that it makes and the balance of convenience favours the making of the freezing order.

101. As Campbell J (as his Honour then was) said in Davis v Turning Properties Pty Ltd [2005] NSWSC 742; (2005) 222 ALR 676 (Davis):

[37] One consequence of a Mareva order not being a species of injunction is that, in deciding whether a Mareva order should be granted, the Court does not operate in the conceptual frame, appropriate to decisions about whether to grant an interlocutory injunction, of enquiring whether there is a serious question to be tried, and, if so, where the balance of convenience lies. Rather, the court adopts the conceptual frame used for other interlocutory decisions, of enquiring whether there is prima facie evidence of those facts which are the basis for the grant of the particular interlocutory relief in question and a reasonably arguable basis for any question of law involved: e.g. as to facts Wendo v R (1963) 109 CLR 559 at 572–3; DPP v Alexander (1993) 33 NSWLR 482 at 493; Attorney-General (NT) v Maurice (1986) 161 CLR 475 at 491. The joint judgment in Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 took this approach, enquiring what the facts of that case showed on a prima facie basis at 406 [60], and 407 [64], and saying at 408 [68] “LED has to show a reasonably arguable case on legal as well as factual matters”. Examining the facts and law by reference to this standard was an essential step in the ultimate conclusion reached in the majority judgment in Cardile. Thus, it settles the Australian law on the appropriate standard of proof for grant of a Mareva order, whatever uncertainty might continue to exist about the appropriate standard of proof for other types of interlocutory order (cf Cross on Evidence, 7th Australian edition (Butterworths 2004) para [1040] — [1045]). However, when deciding whether to grant a Mareva order involves both enquiring whether the case is one in which a Mareva order could as a matter of law possibly be granted, and whether as a matter of discretion the instant case is an appropriate one in which to actually grant one, and if so, in what precise terms, there remains some family resemblance between the conceptual frame in which Mareva orders are granted and that in which interlocutory injunctions are granted.

102. The source of the Court's power to make freezing orders has been determined conclusively by a number of judgments of the High Court.

103. In Cardile, the plurality (Gaudron, McHugh, Gummow and Callinan JJ) accepted, at [42], that the source of the Court’s jurisdiction to make a freezing order against a party to the proceedings is as stated in Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1 at 33, in terms which included (footnotes omitted):

…The general principle which informs the exercise of the power to grant interlocutory relief is that the court may make such orders, at least against the parties to the proceeding against whom final relief might be granted, as are needed to ensure the effective exercise of the jurisdiction invoked. The Federal Court had jurisdiction to make interlocutory orders to prevent frustration of its process in the present proceeding.

104. The plurality in Cardile added, at [42]: “Subject to two matters to which we shall come, this passage should be accepted as a correct statement of principle. The first matter is that, in that passage, the attention of the Court was directed to orders against parties to the proceedings and against whom final relief was sought. In that situation, the focus is the frustration of the court's process. If relief is available against non-parties, the focus must be the administration of justice.”

105. The plurality stated the principle that applies where the freezing order is sought against a non-party, at [57], as follows (footnotes omitted):

What then is the principle to guide the courts in determining whether to grant Mareva relief in a case such as the present where the activities of third parties are the object sought to be restrained? In our opinion such an order may, and we emphasise the word “may”, be appropriate, assuming the existence of other relevant criteria and discretionary factors, in circumstances in which: (i) the third party holds, is using, or has exercised or is exercising a power of disposition over, or is otherwise in possession of, assets, including “claims and expectancies”, of the judgment debtor or potential judgment debtor; or (ii) some process, ultimately enforceable by the courts, is or may be available to the judgment creditor as a consequence of a judgment against that actual or potential judgment debtor, pursuant to which, whether by appointment of a liquidator, trustee in bankruptcy, receiver or otherwise, the third party may be obliged to disgorge property or otherwise contribute to the funds or property of the judgment debtor to help satisfy the judgment against the judgment debtor.

106. In PT Bayan Resources TBK v BCBC Singapore Pte Ltd (2015) 258 CLR 1; [2015] HCA 36 (PT Bayan), the plurality (French CJ, Kiefel, Bell, Gageler and Gordon JJ), at [46], explained the objective of the inherent power in the Court to make a freezing order in the following terms (footnotes omitted):

[46] There is a critical point which Bayan's argument misses. Even where a court makes a freezing order in circumstances in which a substantive proceeding in that court has commenced or is imminent, the process which the order is designed to protect is “a prospective enforcement process”. That description is drawn from the explanation of the nature of a freezing order given by Lord Nicholls of Birkenhead in Mercedes Benz AG v Leiduck. That passage was cited with approval by five members of this Court in Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia [No 3] in a passage which (subject to presently immaterial qualifications) was itself adopted as a correct statement of principle by four members of this Court in Cardile v LED Builders Pty Ltd. Lord Nicholls explained:

“Although normally granted in the proceedings in which the judgment is being sought, [a freezing order] is not granted in aid of the cause of action asserted in the proceedings, at any rate in any ordinary sense. It is not so much relief appurtenant to a money claim as relief appurtenant to a prospective money judgment. It is relief granted to facilitate the process of execution or enforcement which will arise when, but only when, the judgment for payment of an amount of money has been obtained.”

107. In their judgment in the same case, Keane and Nettle JJ added at [64]:

[64] The doctrinal basis of the inherent power of superior courts in Australia to grant a freezing order is not confined to the protection of a pending action or an immediately justiciable cause of action. A superior court has an inherent power to grant a freezing order proleptically to ensure the efficacy of its exercise of judicial power in accordance with the exigencies of its exercise. When it is demonstrated to a superior court that there is a likelihood that its processes will be abused or frustrated, it is within the court's power to make orders considered to be appropriate to prevent that from occurring.

108. It will be noted that all of these statements concerning the essential basis of the jurisdiction to make freezing orders, whether expressed in terms of ensuring the effective exercise of the Court’s jurisdiction, or somewhat more particularly to protect a prospective enforcement process, are expressed in general terms and are not limited to the protection of an existing or prospective money judgment against a judgment debtor.

109. The Court is therefore required to focus on the orders sought by the applicant for the freezing order and the processes of the Court that may be available to enforce or permit the satisfaction of the Court's prospective judgment. Care is necessary, however, because it is not the case that a freezing order is only available when it can be demonstrated that there is a practical way that the relevant judgment can be satisfied in the place where the assets that are the subject of the freezing order are located. As the majority of the High Court (Gageler, Keane, Gordon and Gleeson JJ) said in Deputy Commissioner of Taxation v Huang [2021] HCA 43; (2021) 395 ALR 616 (footnotes omitted):

[29] A freezing order operates to preserve the status quo and not to change it in favour of the party who seeks the order. Mr Huang submitted that the status quo in this case is the existence of assets not liable to execution by any process available to the Deputy Commissioner. That characterisation ignores that “[c]ourts assume, rightly, that those who are subject to its jurisdiction will obey its orders”, including, relevantly, a final judgment to pay a tax debt. The status quo to be preserved by the freezing order is the existence of assets which could be realised to pay the prospective judgment debt.

110. The plurality in Cardile reaffirmed, at [50], a number of principles that require restraint by the Court as to the circumstances in which it will make a freezing order:

[50]…[T]he courts have approached the different factual situations as they have arisen “flexibly”. There is a temptation to use the term “flexible” to cloak a lack of analytical rigour and to escape the need to find a doctrinal and principled basis for orders that are made…It has been truly said that a Mareva order does not deprive the party subject to its restraint either of title to or possession of the assets to which the order extends. Nor does the order improve the position of claimants in an insolvency of the judgment debtor. It operates in personam and not as an attachment. Nevertheless, those statements should not obscure the reality that the granting of a Mareva order is bound to have a significant impact on the property of the person against whom it is made: in a practical sense it operates as a very tight “negative pledge” species of security over property, to which the contempt sanction is attached. It requires a high degree of caution on the part of a court invited to make an order of that kind. An order lightly or wrongly granted may have a capacity to impair or restrict commerce just as much as one appropriately granted may facilitate and ensure its due conduct.

111. Their Honours also, at [53], reinforced the general principle that is applicable in interlocutory applications that: “Discretionary considerations generally also should carefully be weighed before an order is made.”

168. The only example of the making of a freezing order in this context that I have found is the decision of Commissioner Sleight in Sayed v Hemat [2011] WASC 183. The decision was made under the equivalent of UCPR r 25.14(5). The respondents to the orders were parties to the proceedings who were directors of the subject company in the equivalent position of Terry and Geraldine in this case. The orders were made in chambers and were not opposed by the directors. It is not clear why the orders were made against the directors as third parties, given that the assets were owned by the company and the directors were only restrained from causing that company to dispose of them.

169. The judgment given by Black J in Re HPack is instructive. Relevantly, in an application for the winding up of a company the issue was whether the Court could make a freezing order against third parties to protect a judgment that a liquidator of the company may obtain in proceedings instituted against the third parties in the name of the company after the making of the winding up order. As Black J noted, the making of the freezing order at the suit of the party seeking an order to wind up the company would involve a “two step process”. Black J held:

[47] I recognise that this application differs from many applications under UCPR r 25.11, because the existing proceedings brought by the DCT are winding up proceedings, which cannot themselves lead to a judgment in the DCT’s favour; and the Court’s process and the prospective judgment that are sought to be protected are proceedings which could only be brought by a liquidator appointed to HPack if the winding up order is made. There are therefore contingencies in whether such a judgment will be made beyond those which ordinarily exist, including whether the winding up order is made; whether a liquidator appointed to HPack chooses to bring such proceedings; and whether they have sufficient prospects of success.

[48] Nonetheless, it seems to me that the Court does have the requisite jurisdiction to make, on the DCT’s application, a freezing order that will preserve the claims that may be brought by a liquidator appointed to HPack on the DCT’s application. That order is, in my view, directed to preventing the frustration or inhibition of the Court’s winding up process by seeking to meet a danger that a prospective judgment that could be obtained by a liquidator consequent on that process will be wholly or partly unsatisfied, for the purposes of UCPR r 25.11. That jurisdiction is analogous to, although not identical to, the extended jurisdiction contemplated by the observations of the plurality of the High Court in Cardile v LED Builders above at [57] that:

[His Honour then set out [57] from Cardile that is extracted above]

[49] It does not seem to me that that jurisdiction is excluded because the relevant judgment requires a two step process, involving first the winding up of HPack and then the liquidator’s claim. In determining whether to make such an order, the Court would, of course, have to assess the likelihood that a winding up order will be made and that a liquidator would obtain such a judgment, and I do so below…

173. His Honour then proceeded to apply the principles that govern the making of freezing orders separately to the likelihood that the applicant would obtain a winding up order, and then to the likelihood that a liquidator would commence proceedings against the third parties against whom the freezing order was sought; the latter of which steps involved the Court in being satisfied that the liquidator would have a good arguable case on behalf of the company against the third parties and that there was the requisite risk that, in the absence of the freezing order, any judgment that the liquidator might obtain against the third parties would not be satisfied.

174. The statement of principle made by Black J was accepted by Mossop J in Bloc (ACT) Pty Ltd v Crafted Capitol Pty Ltd [2021] ACTSC 81 at [65]. Were it necessary for the purposes of determining the present dispute, I would also respectfully adopt the conclusions stated by Black J.

175. If the Court has power to make a freezing order against a third party to protect a prospective judgment that a liquidator may obtain against that party if the Court makes a winding up order against a company in the application before it, it seems obvious that the Court must have power in proceedings for an order for the winding up of a company to make a freezing order against the company and the parties who control it that will prevent the dissipation of the company’s assets in a manner that will diminish the value to the applicant for the winding up order of the making of that order. As a freezing order can be made to preserve the right of a liquidator to recover property wrongly transferred out of the company, a freezing order should also be available to prevent the property of the company being disposed of in the first place.

176. If I am correct in this conclusion, the Court has power to make the freezing order sought by the plaintiffs in aid of the prospective winding up order that may be made on Efrem’s application against SHBB. In that case, most of the discretionary considerations that I have considered in relation to the application for freezing orders in support of Efrem’s claim against Terry for breach of the alleged fiduciary duties will also apply. However, they will not apply from the perspective that Terry would be the judgment debtor. They would apply from the perspective that Lulubelle is prima facie a creditor of SHBB. A freezing order that prevented SHBB from repaying Lulubelle would involve the Court making an order in favour of a shareholder in an apparently solvent company that prevented the company from paying one of its creditors.

177. As Terry and Geraldine have offered to give a secured indemnity to protect SHBB from the consequences of SHBB being permitted to repay $10 million of the debt owed to Lulubelle by reason of the carveout from the proposed freezing order, I find that the plaintiffs have not established a risk of dissipation of SHBB’s assets that would justify the Court in making the unqualified freezing order sought in prayer 1 of the interlocutory process, in circumstances where that order would have the effect of preventing a creditor of the company being repaid at the suit of a shareholder.

Other claims

178. The plaintiffs seek as an alternative form of relief to Efrem’s “oppression” claim that the Court make an appropriate buyout order as between Efrem and Terry. If such an order were made, the Court could determine the appropriate price by having regard to the consequences of any misconduct that is found against Terry and Geraldine. The plaintiffs have not shown how the dissipation of SHBB’s assets could have the effect that a buyout order would not be satisfied.

179. Finally, the plaintiffs seek orders that have the effect that Efrem will be beneficially entitled to and registered as the holder of half of the shares in SHBB. If Efrem succeeds on this aspect of his claim, it will increase his equity in the companies, but will not change the legal nature of his rights in respect of the companies. Again, the plaintiffs have not shown how the dissipation of the companies’ assets would have the effect that an order that the companies’ share registers be rectified to record Efrem as being a 50% shareholder was not satisfied.

Amount of the carveout that should be authorised

180. It is necessary for the Court to deal with an argument made by the plaintiffs as to why, if a carveout from the orders sought in prayer 1 of the interlocutory process is permitted, it should be in sum substantially less than $10 million. The argument was based upon an aide memoir handed up by senior counsel for the plaintiffs during the hearing on 10 March 2023: see T 3.15. The document consisted of a table that set out the price obtained by SHBB for 2-8 Campbell Parade, and the deductions necessary to determine the net purchase price. It then set out a deduction of the amount of the capital gains tax payable following the sale of the property (which I have authorised the company to pay) as well as two amounts of $2 million that Terry and Efrem apparently agreed would be paid out to each of them from the sale proceeds. The result was a fund of slightly more than $23 million. The document then proceeded upon the basis that all of the debts recorded in the financial statements of SHBB as being owed to Terry and the Terry Related Entities would be repaid by the company. The total amount of those debts of slightly more than $25 million was apparently taken by the plaintiffs from a letter written by the solicitors for the defendants that stated the total amount of the debts. The conclusion expressed in the aide memoir was that the total amount of funds held on trust for SHBB, after the payment of CGT and the loans, would be slightly more than $3.6 million. The result would be that the amount that could be distributed to Terry, Efrem and Geraldine would be slightly more than $1.2 million each.

181. I do not, with respect, follow the logic of this argument. The latest financial statements for SHBB that are in evidence are the draft financial statements for the year ended 30 June 2022. Although the liabilities owed by SHBB to Terry and the Terry Related Entities are recorded, SHBB’s total debt liabilities are stated at slightly more than $35 million. This must be balanced against debts owed to SHBB of about $22 million. The plaintiffs’ argument ignores the fact that, although SHBB is recorded as owing Terry slightly more than $5 million, Terry is recorded as owing SHBB just less than $7.5 million. Furthermore, the plaintiffs’ argument does not take into account other recorded assets of the company, principally shares of about $1.5 million, and shares in other companies called Malicom Pty Ltd (Malicom), Metropole (Katoomba) Pty Ltd (Metropole) and Tova Bella. The share in Malicom is brought to account as having a value of $1, but there is evidence that the asset is worth $5.5 million. The shares in Metropole are brought to account as having a value of $5, but there is evidence that the asset is worth $2.4 million. The shares in Tova Bella are given a value of $17 million, but the evidence is that the recorded value is the historical price of the acquisition of the shares, and there is no evidence as to what the value of the assets and liabilities of Tova Bella is, or hence what the value of SHBB’s shareholding in that company is. Although Efrem’s affidavit evidence acknowledged that he was aware of SHBB’s acquisition of its shareholdings in Malicom and Metropole, he claimed to have had no knowledge of the investment in Tova Bella.

182. The point of these observations is to explain why I do not accept the submission made by the plaintiffs, but they are also relevant insofar as they show that the true financial position of SHBB has not been established by the evidence on this interlocutory application, even on a provisional basis. That financial position will depend upon the recoverable value of the recorded assets of the company, particularly the $17 million investment in Tova Bella, and the recoverability of the debts owed to SHBB that cannot be set off against debts owed by the company.

Formulation of orders

183. After the conclusion of the hearing, the defendants provided revised draft short minutes of order to the Court (DSMO). In the DSMO the defendants responded to a number of issues raised by the Court during the hearing. Subsequently, the plaintiffs provided their own version of the draft short minutes of order to the Court (PSMO). At the Court's request, the plaintiffs provided a combined version of the parties’ draft short minutes of order that marked up the plaintiffs' changes on the DSMO.

184. The competing versions of the draft short minutes of order contain a number of differences, some of which appear to be substantive and others stylistic. In some cases the source of the difference appears to be that the plaintiffs started with the wording of the interlocutory process, while the defendants did not do so. Other differences appear to reflect the stylistic preferences of the drafter of the PSMO. Notwithstanding that the Court has spent some time trying to divine the reasons for some of the differences, this process has not been fruitful.

185. The parties must confer to resolve the drafting differences between their draft short minutes of order that should not require judicial adjudication.

186. I will now turn to the issues that require consideration in formulating the Court's orders.

187. Order 1(a) of the DSMO contains the $10 million carveout sought by the defendants. The PSMO does not. It follows from these reasons that the Court's orders will contain the carveout sought by the defendants.

188. Order 1(a) of the DSMO is in the same terms as the original draft short minutes of order offered by the defendants before the commencement of the hearing. It authorises Terry and Geraldine to cause SHBB to repay any debts recorded in its financial statements as being owed to Terry and the Terry Related Entities. Order 5(b) of the PSMO, which deals with the consequences of the Court permitting a carveout from the relief sought by the plaintiffs in prayer 1 of the interlocutory process, is drawn on the basis that only debts recorded as being payable to Lulubelle may be repaid. Given that the hearing was ultimately conducted on the basis that the defendants only sought authority to repay debts owed by SHBB to Lulubelle, I agree with the plaintiffs' position that order 1(a) should be amended to limit repayments by SHBB to debts recorded as being owed to Lulubelle.

189. Consequently, an equivalent amendment should be made to order 4(b) of the DSMO.

190. Order 4(b) of the DSMO has been amended to extend the indemnity given by Terry and Geraldine to interest on any amount that is paid by SHBB to Lulubelle that the Court finds Lulubelle was not entitled to receive. There is a difference between the parties concerning the appropriate rate of interest. Order 4(b) of the DSMO provides for "interest accrued at the current ‘benchmark interest rate’ under Division 7A of Part III of the Income Tax Assessment Act 1936, being 4.77% pa)". The equivalent order 5(b) of the PSMO provides for "interest accrued at the interest rate identified in Practice Note SC Gen 16 paragraph 5)". It would ordinarily be natural for the Court to choose the Court's rate in a circumstance such as this. However, I recognise that, as SHBB and Lulubelle may be related in a way that payments by one to the other attract, or risk attracting, detrimental consequences under the income tax legislation, there may be a particular justification in this case for the order made by the Court to apply Division 7A interest. The Court is not in a position to resolve this dispute. If there is a reasonably arguable justification for Division 7A interest to be selected, then the Court's order should be drawn on that basis.

191. Order 4(b) of the DSMO has been revised to oblige Terry and Geraldine to indemnify SHBB for interest. However, the obligation of Terry and Geraldine under the mortgage required by order 4(c) of the DSMO does not cover interest. The equivalent version of the order proposed by the plaintiffs, being order 5(c) of the PSMO, requires the mortgage to secure the payment of interest. The appropriate form of order is that suggested by the plaintiffs.

192. By order 4(a) of the DSMO, Terry and Geraldine will undertake not to deal with the Vaucluse property in the manner stated "prior to the conclusion of these proceedings without giving 14 days’ notice in writing to the Plaintiffs". The equivalent order 5(a) of the PSMO has the effect that the restriction on dealing will subsist "until further order". Relevantly, the effect of order 4(c) of the DSMO and order 5(c) of the PSMO is simply that Terry and Geraldine will provide a mortgage to SHBB over the Vaucluse property and cause it to be registered. The offer to give that mortgage has been decisive in causing the Court to decide to make orders substantially as proposed by the defendants. The orders will contemplate that the indemnity given by Terry and Geraldine to SHBB will be secured by a registered first mortgage that gives SHBB adequate security until it can finally be determined whether Lulubelle has made repayments to SHBB, and Terry and Geraldine have performed their indemnity, in relation to any payments that the Court determines that Lulubelle was not entitled to receive. It may be reasonable to leave Terry and Geraldine free to dispose of the Vaucluse property, provided that, at the time of completion of the disposition, they provide equivalent security to support their indemnity. It is probably preferable that the form of words suggested by the plaintiffs be used; that is, that the restriction on Terry and Geraldine dealing with the Vaucluse property continue simply until further order of the Court. If Terry and Geraldine are permitted to cause the indemnity to lapse on 14 days' notice, that will put the plaintiffs and the Court in the position of having to deal with a further interlocutory application by the plaintiffs within the specified 14 days. The Court's orders should place the burden on Terry and Geraldine to make any application to the Court that they wish to make for an order varying their undertaking not to dispose of the Vaucluse property, so that the plaintiffs and the Court will have adequate time to respond to the application.

193. Order 4(c) of the DSMO requires Terry and Geraldine to provide a mortgage over the Vaucluse property to SHBB to secure the indemnity referred to in order 4(b). That mortgage will be provided for the ultimate benefit of Efrem, though it will be given to SHBB. As the majority directors of SHBB, Terry and Geraldine have the power to control its conduct. That conduct would extend to consenting to SHBB discharging the mortgage and causing SHBB to enforce it. Efrem will have no interest in the mortgage and will not be entitled to lodge any caveat against the title to the Vaucluse property. Apparently in acknowledgement of this reality, order 4(d)(ii) contains an undertaking by Terry and Geraldine not to cause SHBB to release the mortgage prior to the conclusion of these proceedings. No undertaking is offered by Terry and Geraldine that they will cause SHBB to enforce against Terry and Geraldine either their indemnity or the mortgage over the Vaucluse property.

194. A registered first mortgage over real property that is intended to protect the interests of a plaintiff, but whose existence depends upon an undertaking by the defendant not to release it, is not, in reality, a registered first mortgage security over property. Compliance with the undertaking by the defendant may cause the mortgage to be effective, but it is still not a true registered first mortgage security. As I understood the submissions made by senior counsel for the plaintiffs on the final day of the hearing, the primary argument as to why the mortgage offered by Terry and Geraldine was not adequate was based upon the considerations that I have just stated. First, the existence of the mortgage itself would depend upon the conduct of the mortgagors in maintaining it. Secondly, even if the mortgage is maintained by the mortgagors, it was the mortgagors who had the power to enforce it. Efrem could not enforce the indemnity or the guarantee, without commencing new derivative proceedings and obtaining orders that permitted him to act in the name of SHBB.

195. However, the terms of order 5(a) and (d)(ii) of the PSMO are the same as the wording of the equivalent orders in the DSMO. If that is the result intended by the plaintiffs, it means that they no longer rely upon the argument made orally by their senior counsel. If that is the case, then this issue is no longer relevant and further attention need not be given to it. However, I will say that I have considerable sympathy for the argument made on behalf of the plaintiffs. It would be preferable in the interests of the parties and the Court for Efrem to be given an enforceable secured right that could not be released without his consent, and which could be enforced on his own initiative. I accept the submission made by senior counsel for the defendants, that as any debt that must be repaid by Lulubelle and indemnified by Terry and Geraldine will be repayable to SHBB, an indemnity and mortgage must be given by Terry and Geraldine to SHBB. I am not satisfied that it is beyond commercial invention for Terry and Geraldine to give an additional indemnity to Efrem supported by the same mortgage over the Vaucluse property. That might be a cumbersome arrangement, but it would provide a real security to Efrem. Any indemnity and security provided directly to Efrem should only be exercisable with the leave of the Court. That way, SHBB would retain the primary capacity to enforce its own rights, and Efrem would only be able to intervene in the unlikely event that it was necessary for the Court to give him leave to do so.

183. Neither version of the draft short minutes of order identifies to whom the various undertakings that are to be given by Terry and Geraldine are to be offered. The chapeau to the orders and the chapeau to order 7 of the DSMO contain undertakings to the Court. The chapeau to order 4 of the DSMO simply refers to Terry and Geraldine giving an undertaking. The value of that undertaking to the plaintiffs will depend upon whether or not it is given to the Court, so that breach of the undertaking may be contempt of court. On the other hand, the indemnity that Terry and Geraldine undertake by order 4(b) of the DSMO must be given to SHBB, so that it becomes a creditor of Terry and Geraldine, which will be necessary to support the validity of the mortgage to be granted in accordance with order 4(c).

184. The parties should give attention to the identification of who is or are to be the beneficiary of the undertaking to be given by Terry and Geraldine.

185. Order 4(b) of the DSMO will require Terry and Geraldine to indemnify SHBB for the value of any repayments made to Lulubelle "to the extent that it is determined at the conclusion of these proceedings that [Lulubelle was] not entitled to receive those payments". The equivalent order 5(b) of the PSMO is in substance to the same effect. If the parties remain in agreement that the Court should make an order substantially in these terms I will do so, although I am concerned that the wording may be a source of serious dispute in the future. The question is: what is meant by Lulubelle not being entitled to receive a repayment? The orders will not permit SHBB to make a payment to Lulubelle unless the payment is a partial repayment of a debt recorded as being owed to Lulubelle "as reflected on the accounts of SHBB". From Lulubelle's perspective, it might be entitled to receive the repayment if it is legally owed a debt. That may be so, whether or not the debt is repayable on demand, or whether it is due at the time for repayment. It appeared to me from the submissions made on behalf of the parties at the hearing that there is scope for argument on that issue. Will Lulubelle be entitled to receive a repayment if the payment is of a valid debt from Lulubelle's perspective, even if it is a breach of the duty owed by Terry and Geraldine to SHBB as directors for them to cause the company to make the payment? Will Lulubelle's entitlement to receive payment be vitiated because the payment is made by Terry and Geraldine in breach of their duty to SHBB, and the decision of Lulubelle to receive the repayment is infected by its directors' knowledge of the breach? In short, the present wording of order 4(b) of the DSMO may entirely ignore the possibility that the repayment of any debt recorded in SHBB's financial statements as being owed to Lulubelle will cause it to receive a preference that is not justified in all of the circumstances that may ultimately be found.

186. The Court has no proper interest in declining to make orders in terms agreed between the parties, but it is proper that the Court require the parties to focus on whether the wording properly specifies the effect intended, and that it does not encourage further dispute that could be avoided by detailed attention to the result that the order is intended to achieve.

187. Presumably, the orders should include case management provisions to require the plaintiffs to litigate in these proceedings the amount that will be required to satisfy the indemnity to be given by Terry and Geraldine, so that if the plaintiffs are successful in the proceedings, the judgment will specify the amount that is required to be repaid to SHBB. Otherwise, there is a risk that these proceedings would spawn further proceedings.

188. The plaintiffs have added order 8 to the PSMO that does not have an equivalent in the DSMO. If made, it will have the effect of preventing Terry and Geraldine from seeking authority under the proposed order 7 to pay any of the liabilities of SHBB and Patglen where those liabilities are owed to Terry, Geraldine, any member of their family, or to the Terry Related Entities. The Court has not yet been advised whether the defendants contest the making of this order.

189. The parties' respective draft short minutes of order deal with other issues as to which there is apparent agreement. It is not necessary to record the effect of those orders in these reasons.

Costs

203. Each of the parties' draft short minutes of order contains an order that would require the other to pay their costs of the interlocutory process, where the defendants are as described at [3] above.

204. The principles that are applicable to costs orders to be made in respect of applications for interlocutory injunctions were considered by the Court of Appeal in Petar v Macedonian Orthodox Community Church St Petka Inc (No 2) [2007] NSWCA 142 per Beazley, Giles and Hodgson JJA, where their Honours said:

[16] The general rule as to costs is that costs follow the event unless it appears to the court that some other order ought to be made as to the whole or part of the costs: see r 42.1 of the Uniform Civil Procedure Rules 2005 (NSW) (the UCPR). Rule 42.7 deals with interlocutory applications. It provides that unless the court otherwise orders:

“The costs of any application or other step in any proceedings … are to be paid and otherwise dealt with in the same way as the general costs of the proceedings.”

…

[18] An order that the costs be ‘costs in the cause’ or ‘costs in the proceedings’ (the terms are interchangeable) means that the costs of the interlocutory proceedings correspond with the final order for costs in the action. Thus if, in the final proceedings, the plaintiff is successful and an order for costs of the final hearing is made in the plaintiff’s favour, the plaintiff gets the costs of the interlocutory proceedings as part of the costs of the action against the defendant, regardless of who was successful on the interlocutory application: see J T Stratford Ltd v Lindley [1969] 1 WLR 1547 at 1553 per Lord Denning MR

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[27] Applications for interlocutory injunctions are commonplace. If there is nothing to distinguish an application from the typical case that comes before the court, then the underlying jurisprudence relating to the exercise of the discretion may warrant the making of what is referred to in the legal vernacular as the “usual order”, whether that be costs in the cause or the plaintiff’s costs in the cause. The making of such an order does not displace the exercise of the court’s discretion. Rather, it is a shorthand form of giving effect to the principles that govern the court’s discretion in circumstances where there are no countervailing or different circumstances to warrant the exercise of the discretion in a different manner.

205. As their Honours observed, each case must depend upon its own facts. In many cases, the justice of the circumstances dictates an adjustment to the application of the usual rule. Even though the Court cannot usually forecast the final outcome of the proceedings, the conduct of a party may justify the outcome that the parties should not receive the costs of the interlocutory application, even if that party is ultimately successful in the proceedings.

206. In the present case, the plaintiffs have succeeded in obtaining interlocutory relief that, in large measure, reflects the prayers contained in the interlocutory process. The defendants have largely agreed to the terms of the interlocutory regime, and the parties have cooperated in adjusting the terms of the orders to be made to accommodate practical considerations that balance the retention of the corporate parties' assets against the need to satisfy the external liabilities of those parties.

207. In my view, this interlocutory application should be treated as conforming with the usual approach of parties to such applications, until the point in time when Terry and Geraldine offered to provide security for the $10 million carveout from the order that required the net proceeds of sale of 2-8 Campbell Parade to be retained on trust for SHBB, by offering to grant a registered mortgage over the Vaucluse property to secure the indemnity that they had earlier offered. From the time when the registered mortgage was offered, I consider that it was unreasonable for the plaintiffs to continue to prosecute this interlocutory application, with the intent that the Court would not make an order for a carveout of any amount to enable SHBB to make repayments to any of Terry or the Terry Related Entities. From that point in time, the only matter that should have been pursued by the plaintiffs was the formulation of the orders that will ultimately be made by the Court.

208. In these circumstances, I consider that the appropriate costs order should deal with the costs of the interlocutory application in two parts. The costs should be the parties' cost in the cause up until the time when the defendants sent to the plaintiffs the offer by Terry and Geraldine to provide the registered first mortgage. From that time, the costs of the interlocutory application should be the defendants' costs in the cause.

209. I considered but rejected the possibility that the plaintiffs should be ordered to pay the defendants' costs of the interlocutory application outright from the time when Terry and Geraldine offered to grant the mortgage. I have rejected that possibility to allow for the fact that the defendants sought and were granted leave to cross-examine Efrem, which is a course that extended the length of the hearing, and I consider that the exercise of cross-examining Efrem has had no real significance to the outcome of the interlocutory application.

210. The parties are invited to confer and to provide to my Associate draft short minutes of order to give effect to these reasons as soon as may be possible. If it is necessary, a request can be made to my Associate to relist the proceedings for further consideration of the orders that should be made.

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Decision last updated: 09 May 2023