Kalenik v Apostolidis (No 2)
[2013] VSC 395
•8 August 2013
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
List B
S CI 7588 of 2000
| ZORICA MIRIJANA KALENIK | Plaintiff |
| v | |
| JOHN IOANNIS APOSTOLIDIS & ORS | Defendants |
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JUDGE: | Judd J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 25 June 2013 | |
DATE OF JUDGMENT: | 8 August 2013 | |
CASE MAY BE CITED AS: | Kalenik v Apostolidis & Ors (No 2) | |
MEDIUM NEUTRAL CITATION: | [2013] VSC 395 | |
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PROPERTY – De facto partners – Adjustment of property interests under Part IX of the Property Law Act 1958 – Final order made for payment of an adjustment sum – Creditors exceed available assets – Application under s 291 of the Property Law Act 1958 for priority over other creditors and for security – Whether application merely in aid of enforcement – Whether Court functus officio – Application invited reconsideration of final orders – Issues not raised at trial or on appeal.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P H Solomon SC with Mr S W Stuckey | Dimos Lawyers |
| For the Defendants | Mr S K Wilson QC | David Tonkin & Associates |
| For Deputy Commissioner of Taxation | Mr A T Broadfoot | Australian Government Solicitors |
HIS HONOUR:
Introduction
The proceeding before the Court was brought by summons dated 26 April 2013 in which the plaintiff, Zorica Kalenik, sought orders under Part IX of the Property Law Act 1958 (Vic) which, she contended, were in aid of enforcement of orders made by the Court of Appeal.[1]
[1][2011] VSCA 307.
The application followed a lengthy trial in early 2009.[2] At trial, Kalenik sought an order against Apostolidis, her de facto partner, for an adjustment of property under s 285 of the Act. She was awarded the sum of $500 000, plus interest and costs.
[2][2009] VSC 208.
There was an appeal and a cross‑appeal, and two later proceedings commenced in the Trial Division in which the defendants, John Ioannis Apostolidis and associated entities, sought the removal of caveats lodged by Kalenik[3] over titles to property owned by the defendants.
[3]Originating Motions filed 6 June 2012 [3230/2012] and 28 November 2012 [6648/2012] respectively.
The caveats lodged by Kalenik prior to the trial claimed an interest under a constructive trust. Apostolidis was the registered proprietor of a property at 11 Yarrabee Court, Mount Waverley. The second defendant, DSK Holdings Pty Ltd, was the registered proprietor of the property at 12 Yarrabee Court, Mount Waverley, and Unit 7, 200–206 Princes Highway, Dandenong. The third defendant, Azura Pty Ltd, was the registered proprietor of property at Unit 5, 200–206 Princes Highway, Dandenong. The caveat lodged over 11 Yarrabee Court and Unit 5 was dated 5 April 2000, and the caveat lodged over Unit 7 was dated 16 March 2001. The caveat lodged over 12 Yarrabee Court was dated 30 November 2007.
Following the trial, Kalenik lodged further caveats over the properties, claiming an equitable interest pursuant to orders of the Court. These caveats were all dated 1 April 2010. Further caveats, dated 1 May 2012, were lodged over the properties following judgment by the Court of Appeal. Those caveats claimed an equitable interest pursuant to orders made by that Court on 13 October 2011.
It is apparent that the orders at trial were made on the common assumption that the assets available to the defendants were sufficient to meet their liabilities, including the award in favour of Kalenik. The pool of assets had been valued, for the purpose of the trial, at approximately $11 million, including a business owned by DSK Holdings, valued at around $10 million. There was evidence at trial of a potential liability for income tax of approximately $3.4 million. That liability was taken into account by the trial judge when making the adjustment between the de facto partners.
In the period between the conclusion of the trial and the hearing of the appeal, events occurred that undermined the common assumption concerning the value of the assets and the extent of liabilities. The Deputy Commissioner of Taxation issued assessments against Apostolidis and DSK Holdings, and obtained judgments, which in total exceeded $14 million. Furthermore, the Commissioner obtained freezing orders over the properties of Apostolidis, DSK Holdings and the fourth defendant, Yarrabee Investments Pty Ltd. Those freezing orders destroyed the value of assets available to creditors. Thus, the liability of the defendants substantially increased, while the pool of assets substantially decreased.
On 13 October 2011, the Court of Appeal allowed the appeal and cross‑appeal. The award made in favour of Kalenik was increased to $1 175 000. The Commissioner had been joined as a party on the appeal and cross‑appeal. The amount of the judgments in his favour were taken into account by the Court of Appeal when making the adjustment between the de facto partners.
Following the appeal, a sum that had been paid into court by Apostolidis was released to Kalenik. The amount released fell short of the judgment sum by $495 000. Interest accrued on the unpaid portion of the judgment sum estimated, at the date of this trial, at around $75 000. Kalenik claimed that she was entitled to the unpaid balance, with interest and costs pursuant to various orders. So stated, her claim seemed unexceptional.
On 24 April 2012, Apostolidis and the Commissioner reached agreement, recorded in a Deed of Settlement, under which the Commissioner agreed to accept the sum of $4 513 569 in settlement of the total judgment sum, if paid on or before 28 March 2013. The Commissioner was entitled to call for mortgages, and Apostolidis was to procure the sale of certain properties to make the payment.
Kalenik contended that, while the Commissioner was an unsecured creditor of the judgment debtors, she was entitled to priority for her claims, insofar as the fund generated by the sale of assets was insufficient to pay all creditors. Her claim for priority was based on the contention that the amount due to the Commissioner had been twice taken into account by the Court of Appeal when making the award, and that accordingly, her claim should be paid in full from the proceeds, even if the Commissioner was not. She sought to invoke the jurisdiction of this Court to make an order under s 291 of the Act to achieve that outcome. Apostolidis and the Commissioner contended that the Court was functus officio, unable to make the orders sought by Kalenik, and that Kalenik was an unsecured creditor of Apostolidis, along with the Commissioner and other creditors.
A central question at trial was the true character of Kalenik’s claim. Were the orders for priority and security merely in aid of enforcement of the existing orders of the Court of Appeal, or did they invite a reconsideration of the award or matters already, and finally, determined by the Court? To resolve the question, it was necessary to review some of the orders, and the reasons for judgement, of the trial judge and the Court of Appeal.
Background
In addition to her claim brought under Part IX of the Act, Kalenik had made an alternative claim for declarations that Apostolidis and some of the defendant entities held property on a constructive trust for her. When declining to consider that claim, the trial judge said:[4]
In this case, it is unnecessary to consider this aspect further. The remedy of a constructive trust is unnecessary in the circumstances of this case, and would operate unfairly to the defendant. As the plaintiff has established a right to an adjustment order under s 285(1) of the Act, the Court has ample power to protect the plaintiff against possible dissipation of assets by the defendant in order to defeat execution upon the plaintiff’s judgment entitlement. At present, the plaintiff’s position is protected by caveats lodged over real property. There is a counter‑claim for the removal of those caveats.
In my view, having regard to the dim opinion which I take of the defendant’s credibility and business practices, this is an appropriate case in which to make orders under s 291(1)(g) of the Act in aid of enforcement of the plaintiff’s judgment. That can be done by the making of appropriate injunctions restraining, to the extent necessary, disposition or further encumbering of real property owned by the defendant, Azura and/or DSK. I will hear the parties as to the form of such injunctions. When those injunctions are in place, the plaintiff’s caveats should be removed. In the event that the judgment is not satisfied by the defendant, the Court retains the power under s 291(1)(b) of the Act to order the sale of property owned by the defendant and companies associated with him, and to make orders for the distribution of the proceeds of sale to satisfy the judgment.
[4][2009] VSC 208, [703]–[705] (emphasis added).
The defendants appealed and Kalenik cross‑appealed. An application for a stay on the judgment was made to the trial judge, and on 18 September 2009, the Court made the following orders:
Upon the defendants and each of them by their counsel undertaking, subject to their rights of appeal and any order made by the Court of Appeal, that:
(1)they will not seek to remove any caveat lodged by the Plaintiff over any real estate owned by them or any of them (collectively ‘the properties’);
(2)the properties shall stand as security for the payment of any judgment sum, interest or costs recovered by the Plaintiff against them or any of them in the proceedings; and
(3)they will abide by any orders made by the Court to effectuate the security referred to in paragraph (2) of these undertakings.
THE COURT ORDERS THAT:
1.There be a stay of execution on the judgment pronounced by the Court on 17 September 2009, and on any judgement subsequently made requiring the Defendants or any of them to pay costs to the Plaintiff, until the expiration of 14 clear days from the date the Court makes costs orders in the proceeding.
After setting aside the orders made by the trial judge, the Court of Appeal ordered:
5.In lieu thereof, it is ordered pursuant to s 285 of the Property Law Act 1958 that the defendant, Ioannis John Apostolidis, pay the plaintiff, Zorica Kalenik, the sum of $1 175 000.
6.For the avoidance of doubt, it is declared that the order for payment of the sum of $1 175 000 is calculated to effect an adjustment pursuant to s 285 of the Property Law Act 1958 that Mr Apostolidis and Ms Kalenik’s interests as former de facto partners in the property of one or both of them and because the property has been valued as at the date of judgment, it is not intended that the sum of $1 175 000 bear interest up to the date of judgment.
Following the judgment of the Court of Appeal, Kalenik filed a ‘Memorandum to the Court – Outstanding Issues’ in which she identified as one issue, ‘s 291 of the Property Law Act’. What that description was meant to convey is unclear, although a reference in the memorandum to parts of the judgment of the trial judge, including the paragraph set out above, would suggest that Kalenik might have had in mind to reserve a right to make an application under s 291 for orders conferring on her an interest in one or more of the properties. Her right to apply for such orders was acknowledged by the Court of Appeal.
In the course of her submission contained in the memorandum, Kalenik relied on a contention, made prior to the hearing, in notices given to the Attorney’s‑General under s 78B of the Judiciary Act 1903, that:
… part of the relief which Kalenik may seek in her cross‑appeal is an order which, in substance, adjusts interests in property held by one or more than one of the Appellants.[5]
[5]Emphasis added.
It does not appear that any application was made to the Court of Appeal to adjust interests in one or more of the properties, or to give security to Kalenik. While no such application was pressed, and no orders made to that effect by the Court of Appeal, it did note[6] that Kalenik had flagged in argument, that she might later obtain an order converting a money adjustment order into an order for a transfer of real property, thereby making her a secured creditor. Nevertheless, what is clear from the reasons of the Court of Appeal is that it regarded Kalenik and the Commissioner as unsecured creditors.[7]
That brings us to the position of the Deputy Commissioner. Assuming that judgments in his favour are sustained, neither he nor K, as unsecured creditors, could hope to recover in full against A or the companies.[8] The amount which the Deputy Commissioner would recover might be the less, however, to the extent that K also had a claim on the available funds.
[6][2011] VSCA 307, [99], footnote 81.
[7][2011] VSCA 307, [99] (emphasis added).
[8]Although the Deputy Commissioner does not have judgments against Azura or Yarrabee, A was the sole shareholder in those companies at date of trial; in his bankruptcy, they would doubtless be wound-up (emphasis added).
Following the appeal and the agreement reached between Apostolidis and the Commissioner, Apostolidis, DSK Holdings and Azura made application for the removal of some of the caveats. The application was heard by Cavanough J on 21 June 2012, who ordered the removal of a caveat from the register book and that other unregistered caveats lodged with the Registrar.
By originating motion and summons dated 28 November 2012 the defendants sought to be released from the undertakings given to the court on 18 September 2009 and for orders removing the earlier caveats over the properties. When that application came on for hearing, it became clear that Kalenik asserted a proprietary interest in the properties. She also sought control over the sale process.
While the deed of compromise required the plaintiff to grant mortgages in his favour, the Commissioner did not contend that his claim had priority over Kalenik’s claim. Orders were made on 18 December 2012 relieving the defendants of their undertakings and removing the caveats. The proceeds of any sale were to be held in a trust account maintained by the Australian Government Solicitor pending the determination of a dispute, foreshadowed by Kalenik, to assert her claim for a proprietary interest in properties, and priority over the Commissioner as a creditor.
On 4 April 2013, Kalenik commenced a proceeding by Originating Process against the Commissioner, Apostolidis, DSK Holdings and Azura in which she sought orders that she be paid, from the proceeds of sale of any of the properties, the unpaid balance of the award made by the Court of Appeal ($489 188), together with interest and costs.[9] She also sought orders pursuant to s 291 of the Act granting her security over properties owned by Apostolidis, DSK Holdings and Azura to secure the payment of the unpaid portion of the award and interest.
[9]S CI 2013 01649.
The Commissioner responded, in correspondence with Kalenik, contending that the proceeding commenced by Originating Process was an abuse of process, because a claim under Part IX of the Act had already been made and determined. In an attempt to deflect that line of attack, Kalenik filed a summons in this proceeding on 26 April 2013, in which she sought an order that the amount outstanding under the award made by the Court of Appeal be secured by four properties: 11 and 12 Yarrabee Court, Mount Waverley, and Units 5 and 7, 200–206 Princes Highway, Dandenong. She sought appointment as trustee for the sale of the property at 11 Yarrabee Court, Mount Waverley, alternatively trustee for the sale of Unit 7, 200–206 Princes Highway, Dandenong.
It is the summons filed on 26 April 2013, issued in this proceeding, that Kalenik now prosecutes. Because the Commissioner was not a party to this proceeding, except on appeal, he was added as a defendant to the summons to ensure that all parties were properly before the Court on the adjudication of the issues.
Contentions
The premise for Kalenik’s claim was that the relief sought was in aid of the enforcement of orders already made. By the order made on 18 September 2009, the trial judge had stayed execution of the judgment, upon the undertakings mentioned above, which included an undertaking that the defendants would not seek to remove the caveats. The order included an acknowledgement that the affected properties would stand as security for payment of the award to Kalenik. Kalenik contended that because the undertakings were designed to protect the value of the award, secured by the properties, no additional order was necessary under s 291 of the Act at that time. By implication, Kalenik contended that in the absence of such undertakings, the trial judge may well have made orders of the kind now sought by her. But he did not.
Kalenik also contended that, on appeal, the interests of the Commissioner had been protected twice in the approach that had been taken by the court when making her award under s 285 of the Act. She contended that, in the first instance, the Commissioner’s entitlement had been taken into account when calculating the pool of assets for the purpose of making an adjustment, and that her interest had again been adjusted down ‘to take account of the Deputy Commissioner’s position’,[10] resulting in the award that was said to equal about 27 per cent of the pool. So, Kalenik argued, there had been an adjustment in arriving at the pool, and a further adjustment in making the award.
[10][2011] VSCA 307, [117].
Kalenik argued that these adjustments made by the Court of Appeal were evident in the following passages from its judgment:
The second argument advanced on behalf of the Deputy Commissioner was that, if the Court does have jurisdiction to make an order in favour of K, the pool of assets should be calculated as it is at present, on a net asset basis, which is to say, after deduction of existing liabilities. It would follow, it was contended, that there would be no property in respect of which an order could be made in favour of K and thus that no order should be made[.]
We accept that argument up to a point. As Branson and Merkel JJ observed in Mateo, when the Family Court exercises power under s 79 of the Family Law Act, it should have regard to the interests of third party unsecured creditors. We accept that the same applies to the exercise of power under s 285 of the PLA.
We also accept, as we discussed above, that the asset pool should be re-valued as at the present time. As a general rule, the value of an asset pool for the purposes of s 285 should be determined as at the time of judgment rather than at some earlier date. It is only where there are good reasons to adopt another date that it should be chosen, and here there are not any good reasons to adopt another date.
Admittedly, when the judge dealt with the matter, it seemed as though there were good reasons to value the pool as at the date of separation. The parties were agreed on it as the appropriate date and, to the extent that contingent liabilities were than capable of estimation, it appeared that A would have sufficient assets to satisfy third party creditors and K’s entitlement if the pool were valued on that basis. Now, however, that has changed. In light of the fresh evidence, it can be seen that A’s tax liability and his obligations to other third party creditors substantially exceed his existing assets. In those circumstances, it would be unrealistic and unsatisfactory to value assets as if the facts were as they were believed to be in the past.
We do not accept, however, that so to value the pool must result in the conclusion that there are no assets in respect of which an order may be made in favour of K. Although a practice has grown up of valuing assts on a net basis, the law recognizes that, in some cases, the court may take the view that, because of the circumstances surrounding the incurrence of a liability, it should be excluded in whole or part from the calculation of net assets. In this case, we consider that a significant part of the tax debt should be excluded from the calculation because of the circumstances in which it was incurred. [11]
[11][2011] VSCA 307, [107]–[111] (footnotes omitted, emphasis added).
The Court of Appeal made reference to the decision of Evatt CJ in the Marriage of Prince,[12] in which the Family Court acknowledged circumstances in which a liability incurred by one party might be disregarded in determining an adjustment of property interests, and continued:[13]
Parity of reasoning implies that the same holds true under s 285 of the PLA. There is a general practice of valuing the asset pool on a net basis, but it is within the discretion of the court to disregard a liability which ought in justice and equity to be wholly or partly disregarded in determining the appropriate order; and the court may do so, in among other circumstances, where the liability has been incurred in deliberate or reckless disregard of the other party's potential entitlement under s 285.
For the reasons earlier stated, we accept that K should share the burden of so much of the tax debt as relates to the period up to the date of separation. But because of the circumstances in which the remainder of the tax debt was incurred, we do not think it just or equitable that K should have to share fully in the burden of the remainder. After all, following separation, all of the assets were under the control of A; and, as the judge said, A could have regularised the tax position at any time and so stopped penalties and interest accruing. He chose instead to continue to evade tax, for his own benefit, and thus fraudulently to expose the asset pool to ever increasing tax liabilities. K had no say in or control over that.
Additionally, after the Deputy Commissioner issued amended assessments, he obtained freezing orders which, according to the fresh evidence, to a very large degree hampered the ability of A to continue to carry on business, leading to the destruction of the bulk of its value. It has had the effect of virtually obliterating the value of the asset pool, such that it is now worth only a tiny fraction of its worth at the date of separation. Unfortunately for K, she must share in that reduction, because her entitlement is to be calculated on the basis of the value of assets as they are now. But it would not be fair to expose her to the effects of that and then further reduce her entitlement by reference to the effects of the tax burden relating to the period after the date of separation. To do so would be tantamount to granting priority to the Deputy Commissioner in relation to a liability from which K did not benefit and over the incurrence of which she had no control, in circumstances where the way in which, according to the evidence before us, the Deputy Commissioner has gone about securing the tax debt, by freezing the business cash flow, has resulted in the destruction of most of the value of the assets from which not only he and K but also any other third party creditors might otherwise have recovered their entitlements. There is no reason in justice or equity to do that.
In the event, it appears to us that, to make an order adjusting the interests of A and K which is just and equitable, we should moderate the adjustment which we were otherwise minded to make in her favour to take account of the Deputy Commissioner’s position. We have decided that an order should be made in her favour for $1,175,000, that being about 27 per cent of the pool of $4,357,505.[14]
[12](1984) 9 Fam LR 481, 486.
[13][2011] VSCA 307, [114]–[117] (footnotes omitted).
[14]Emphasis added.
Kalenik contended that because of the reasoning process adopted by the Court, when making the award, justice required that she be paid the whole of the award amount and interest in priority over the claims of the Commissioner as an unsecured creditor. But what these passages disclose is that the Court of Appeal was alive to the tension between the respective claims to available assets when making the adjustment and award, and avoided a course that was ‘tantamount to granting priority to the Deputy Commissioner’. Kalenik did not seek to persuade the Court that her award should be given priority over other creditors, and no such order was made.
Apostolidis and the Commissioner contended that, as a mere creditor, Kalenik was in no better position than the Commissioner, entitled to share pari passu in the proceeds from the sale of the assets available to meet the claims of creditors. The Commissioner, who assumed the carriage of the argument, contended that insofar as Kalenik sought relief under s 291 of the Act, the Court was functus officio.
The Commissioner and Apostolidis contended that Kalenik did not merely seek orders in aid of enforcement, but a new and different adjustment that ought to have been pursued, if at all, at trial or before the Court of Appeal. They contended that it was now too late to have a further adjustment made, so as to prefer Kalenik’s ability to recover her claim over that of the Commissioner and other creditors.[15]
[15]See generally Bailey v Marinoff (1971) 125 CLR 529, 530–2.
The Commissioner also contended that the due administration of justice in this Court did not favour granting further relief under s 291 of the Act. That was an argument invoking the need for finality in the resolution of disputes. Furthermore, he contended that as he was not a party to the proceeding at trial, he was denied an opportunity to participate when findings of fact were made concerning the conduct of Apostolidis and Kalenik in relation to tax evasion and their respective responsibility for the liability. As against that, however, the Commissioner was a party to and fully participated in the appeal and cross appeal.
Kalenik relied upon what she contended was the acknowledgment by the trial judge and the Court of Appeal of her right to apply for orders in aid of enforcement at some later time. There can be no doubt that the trial judge and the Court of Appeal were mindful of the possibility that orders might be made under s 291 of the Act in aid of enforcement in the future. What then is the true character of the orders now sought by Kalenik?
Conclusion
The orders, and the undertakings given by the defendants’ counsel on 18 September 2009, were no more or less that part of a protective regime to secure the plaintiff’s position pending an appeal, made in the context of an application for a stay. A final order for payment of a defined amount had already been made by the trial judge under s 285 of the Act. That order did not include the grant of a proprietary interest in any property, and was not coupled with any order that Kalenik’s claim would have priority over any other claim against the available assets.
While the trial judge acknowledged the possibility that an order to sell property, and distribute the proceeds to Kalenik, might be appropriate in future, such a possibility went no further than to identify a mechanism by which the judgment sum might be paid. The trial judge could have, but did not, order the transfer of a property, or that payment of the sum awarded be secured by one or more of the properties until paid. But all of that was overtaken by the Court of Appeal.
The judgment of the Court of Appeal does not disclose, as a ground of appeal or contention, a complaint that the trial judge erred in refusing to decide the constructive trust case advanced by Kalenik, or that the award ought to have been converted into a proprietary interest, or secured by property, or that some priority ought to be given to Kalenik’s claim over other creditors. The nature of the competing claims by Kalenik and the Commissioner as unsecured creditors was, however, a necessary part of the reasoning process of the Court in arriving at its decision and the award, expressed only in a money sum. To now confer on Kalenik priority over other creditors would be inconsistent with the reasoning of the Court of Appeal, and have the effect of undermining its adjustment, and the basis for the consequential award.
The rights of creditors to compete for available assets with Kalenik was not an issue at trial, or on appeal. Creditors other than the Commissioner may have an interest. Orders of the kind sought by Kalenik would compromise the position of other creditors and perhaps even Apostolidis. Because the issue was not before the Court, at trial or on appeal, the impact remains uncertain.
This summons, and the proceeding commenced by originating motion on 4 April 2013, cannot be employed to determine a contest between Kalenik and other creditors over who has priority to a diminished pool of assets. Any such contest ought to have been raised, argued and resolved before the trial judge or, at the very latest, in the Court of Appeal. It is now too late. The Court of Appeal has given judgment, and it is not for this Court to improve the value of Kalenik’s position beyond that which was reflected in the award made by the Court of Appeal. To do so would amount to an impermissible readjustment under s 285 of the Act, because the Court is functus officio, or by reason of the principle in Port of Melbourne Authority v Anshun Pty Ltd[16]. Even if the application were to be characterised as one in aid of enforcement, I would decline to exercise the discretion under s 291 of the Act to make such orders for the reasons given above.
[16](1981) 147 CLR 589.
In summary, I find that the application by Kalenik for priority over the claims of the Commissioner and for security for payment, invited this Court to improve the value of her entitlement, by giving her priority over other creditors of Apostolidis. An order having the effect of giving priority to Kalenik or securing her debt would disadvantage creditors including, but not limited to, the Commissioner. It may also have an adverse impact on the liability of Apostolidis to creditors.
Kalenik might seek orders under s 291 of the Act in aid of enforcement. Such an application may be determined by this Court. For example, an order may be made that a property be sold and the proceeds distributed. But an order granting Kalenik priority, or directing that one or more properties stand as security for her debt would, in the context of the judgment and reasons for judgment of the Court of Appeal, go well beyond orders made in aid of enforcement. Such orders, if made, would tend to readjust the property interests of the de facto partners. The Court has finally determined Kalenik’s application under s 285 of the Act. That determination may not be revisited.
The summons filed 26 April 2013, and the originating motion filed 4 April 2013, are dismissed with costs.
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