Kefalianos v Bell (Ruling No. 2)

[2022] VCC 1545

IN THE COUNTY COURT OF VICTORIA

AT Melbourne

COMMERCIAL DIVISION

Revised
Not Restricted
Suitable for Publication

General List

Case No. CI-20-00717

William Kefalianos		First plaintiff/ first defendant by counterclaim
ACN 079 559 667 Pty Ltd		Second plaintiff/ second defendant by counterclaim
Arcone Pty Ltd		Fourth plaintiff
v
Tony Bell		First defendant/ plaintiff by counterclaim
Alphington Manor Pty Ltd		Second defendant

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JUDGE:	Judicial Registrar Bennett
WHERE HELD:	Melbourne
DATE OF HEARING:	13 September 2022
DATE OF RULING:	13 September 2022
CASE MAY BE CITED AS:	Kefalianos & Ors v Bell & Anor (Ruling No. 2)
MEDIUM NEUTRAL CITATION:	[2022] VCC 1545

RULING
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Subject:  PRACTICE AND PROCEDURE

Catchwords:             Application by company to set aside default judgment – Director of company not validly appointed when application made – Whether application should be adjourned or dismissed

Bankruptcy – Disclaimer of assets – Vesting order

Legislation Cited:     Bankruptcy Act 1966 (Cth) ss58, 129AA, 133 and 133(9); Civil Procedure Act 2010 (Vic) ss9(1), 9(1)(a), 9(1)(c), 9(1)(d), 9(1)(e) and 9(1)(f); County Court Civil Procedure Rules 2018 (Vic) r21.07

Ruling: Directions hearing and hearing of the second defendant’s summons dated 30 June 2022 adjourned

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APPEARANCES:	Counsel	Solicitors
For the plaintiffs	Mr E Moon	Baker McKenzie
For the defendants	Ms M Harris Mr D Barton	T F Grundy

JUDICIAL REGISTRAR:

1The principal matter before the Court today is a summons dated 30 June 2022, purportedly filed on behalf of the second defendant, Alphington Manor Pty Ltd (“Alphington Manor”), on 4 July 2022.  That summons seeks orders setting aside a judgment entered in default of appearance against Alphington Manor on 23 April 2020 for $555,955.37.  Although the summons erroneously states that the order setting aside the default judgment is sought pursuant to “Regulation 80.1(2)” of the County Court Civil Procedure Rules 2018, the defendants recognised this error in their written submissions and it is clear, as those submissions indicate, that the relevant rule pursuant to which the application is made is r21.07.

2Neither party contends that the summons should be dealt with on its merits today.  The defendants seek an adjournment of the summons.  The plaintiffs say that the summons is hopelessly flawed and should be dismissed.

3Today’s hearing is also listed as a directions hearing for the purposes of this matter more generally.  A directions hearing was necessary because, at the last directions hearing, the defendants foreshadowed a number of steps beyond the present application, in particular the potential joinder of Pickelhaube Pty Ltd (“Pickelhaube”) as second plaintiff by counterclaim and the consequential amendment of the counterclaim presently brought by Mr Tony Bell, the first plaintiff by counterclaim.  It will also be necessary for the plaintiffs/defendants by counterclaim to put on further pleadings either in response to their opponents’ new pleadings to which I have just referred, or in response to their opponents’ extant pleadings in the event that no such new pleadings come to pass.  The plaintiffs cannot put on those pleadings until such time as the defendants’ position has been settled.

4Counsel for the defendants informed me that the defendants’ position cannot be settled unless and until the outcome of the position in respect of the default judgment is known.  That is to say, the question of whether the default judgment is to be set aside needs to be dealt with first.  It seems to me that even once the position in respect of the default judgment is known, that will not resolve other aspects of the defendants’ position.  The resolution of the issue of the default judgment is a necessary, but not sufficient, precondition to the resolution of the defendants’ overall position in relation to the pleadings in this proceeding. 

5Counsel for the plaintiffs did not contend that I should deal with any other interlocutory matters today besides the defendants’ summons.  He informed me that the plaintiffs’ outstanding pleadings would be attended to upon the defendants’ position becoming clear in respect of the defendants’ foreshadowed joinder application and pleading amendments.

6I turn then to the summons and the defendants’ adjournment application.  By way of background to that application, I understand the following matters no longer to be in controversy between the parties: 

(a) First, prior to becoming a bankrupt on 31 January 2019, Mr Aldo De Luca held shares in Alphington Manor. However, from 31 January 2019, those shares vested in Mr De Luca’s trustee in bankruptcy pursuant to s58 of the Bankruptcy Act 1966 (Cth) as a result of Mr De Luca’s bankruptcy commencing on that date.

(b)   Secondly, from at least the time of the commencement of these proceedings in February 2020, Alphington Manor has had no directors.

(c)   Thirdly, after Mr De Luca was discharged from bankruptcy on 16 March 2022, Mr De Luca purported to appoint Mr Bell as a director of Alphington Manor. 

(d) Fourthly, s129AA of the Bankruptcy Act has the effect that the Alphington Manor shares in question remain vested in Mr De Luca’s trustee until the sixth anniversary of Mr De Luca’s discharge from bankruptcy, which would not be until March 2028.  (I interpolate here that Mr De Luca and Mr Bell appear to have operated on the erroneous basis that, upon Mr De Luca’s discharge from bankruptcy, his Alphington Manor shares would re-vest in him.)

(e)   Fifthly, at the time that Mr De Luca purported to appoint Mr Bell as a director of Alphington Manor, Mr De Luca did not actually hold any shares in Alphington Manor. 

(f)    Sixthly, it follows that Mr De Luca had no ability to appoint Mr Bell and that Mr Bell was therefore not validly appointed as a director of Alphington Manor.

(g)   Seventhly, and finally, it follows that Alphington Manor currently has no directors and, moreover, had no directors at the time of the filing of the present summons purportedly on its behalf on 4 July 2022.

7Having set out those background matters, I turn now to the bases for the defendants’ adjournment application.  In essence, I understood there broadly to be three such bases: 

(a)   The first basis was that the defendants had only relatively recently become aware of the invalidity of Mr Bell’s appointment, when it was drawn to their attention by the plaintiffs’ solicitors by letter dated 25 August 2022, and needed time to consider the effect thereof upon this litigation in an overall sense, not only in respect of the present summons.  Amongst other things, there are other transactions and matters involving the second defendant which may be impacted by the invalid appointment.  This includes the vesting order made by her Honour Judge A Ryan on 30 May 2022 in proceeding CI-22-01867.

(b) The second basis was more specific to this summons. The defendants stated that Mr De Luca has made a written request to his former trustee in bankruptcy seeking the trustee’s disclaimer of the Alphington Manor shares pursuant to s133 of the Bankruptcy Act. The trustee has 28 days to respond, and those 28 days have not yet elapsed. In the event that the trustee disclaims the shares, it is possible that Mr Bell or Pickelhaube will make an application to the Federal Court pursuant to s133(9) of the Bankruptcy Act seeking an order vesting the shares in them.  It was implicit in the defendants’ submissions that this would provide an avenue for the present summons to be saved, as it were, although the defendants’ written and oral submissions did not indicate precisely how it was that that they envisaged that occurring.

(c)   The third basis was, as counsel for the defendants candidly informed the Court, that these issues had arisen relatively recently and involved matters of some complexity, and that counsel were not in a position to address the issues as fulsomely today as they considered necessary and they wished to have further time to do so. 

8The defendants’ reliance upon these bases for adjournment, submitted their counsel, explained why the defendants’ submissions had not gone into the level of detail about the substantive issues that might perhaps otherwise be expected.  Rather, the focus of the defendants’ written and oral submissions was on the need for the defendants and their counsel to come to grips with a range of procedural issues arising from the matters drawn to their attention by the plaintiffs’ solicitors in the letter of 25 August 2022.

9The adjournment sought by the defendants was to a date not before 7 October 2022, so that the 28-day period will have elapsed for the trustee to respond to the disclaimer request. 

10The plaintiffs resisted the defendants’ adjournment application. They contended that the summons was fatally flawed because of the chain of legal consequences culminating in the invalidity of Mr Bell’s appointment and, thus, the filing of the summons purportedly on behalf of the second defendant without its authority. Counsel for the plaintiffs submitted that even if the trustee disclaimed the shares, and even if a vesting order were made in favour of Mr Bell or Pickelhaube, the appointment of Mr Bell by Mr DeLuca would still be bad. That is to say, none of the steps proposed pursuant to s133 of the Bankruptcy Act would remedy the fact that Mr De Luca was not in a position to appoint Mr Bell and that Mr Bell was not in a position to cause the second defendant validly to issue the present summons.

11Counsel for the plaintiffs further submitted that there would be no prejudice to the defendants if the current summons were dismissed, because the second defendant could issue a new summons in future in the event that matters transpired such that a director of the second defendant were validly appointed.

12The key substantive issues in relation to the validity of the summons appear to me to be these:

(a) First, are the Alphington Manor shares to be disclaimed by the trustee pursuant to s133 of the Bankruptcy Act?  This self-evidently is a matter for the trustee.  Presumably the trustee will also consider in this context whether or not it is open to him to disclaim the shares, that is to say, whether the shares in question are property of a kind in respect of which a disclaimer can properly be made. 

(b) Secondly, if the shares are disclaimed by the trustee, can or will a vesting order be made by the Federal Court pursuant to s133(9)? This is a matter for the Federal Court, if an application is made to it. The only caveat I would express here is that if I could be persuaded that any such application had no real prospect of succeeding, it may be that I could be persuaded to dismiss the present summons on that basis – for example, if I were able to conclude that neither Pickelhaube nor Mr Bell had any interest in the shares that would be capable of providing the foundation for a vesting order. I note that it was in relation to questions from the Court about this issue that the defendants’ counsel reinforced their submission that the defendants’ adjournment application was made partly on the basis that counsel needed further time to consider and address such issues.

(c) Thirdly, if a vesting order were made by the Federal Court and the new shareholder appointed a director to the second defendant, whether that be Mr Bell or somebody else, would it follow that the present summons can remain on foot and be prosecuted? In relation to this issue, counsel for the plaintiffs correctly submitted that the defendants had not identified how it was said that the proposed actions under s133 of the Bankruptcy Act could operate, in effect retrospectively, so as to validate the summons.  But this was another issue which the defendants’ counsel submitted that they had not yet had the opportunity properly to consider and make submissions about. 

13I understand the above chain of events, namely, disclaimer, vesting order, and appointment of director, to be the only procedure by which the defendants contend that the present summons can be saved.  If that chain of events does not come to pass, the defendants accept that the summons cannot remain alive. 

14I accept as a general proposition that it is undesirable to grant the adjournment of an application which is fatally flawed or bound to fail.  However, I consider the threshold for refusing an adjournment on that basis to be a high one.  Moreover, I would be very slow to refuse an adjournment in circumstances where, as here, counsel for a party tells the Court that they need further time to consider and make submissions in relation to key issues going to the very question of whether the summons is bound to fail and should be dismissed.  There appear to me, on the basis of the submissions that I have heard today, to be some considerable hurdles in the way of the summons remaining on foot.  But it may be that, given the time which they seek, the defendants’ counsel are able to identify bases upon which they say that the current summons properly ought to be permitted to stand.  Alternatively, given more time, it may be that they form the view that the plaintiffs’ counsel is correct in submitting that the summons is hopelessly flawed and should be withdrawn or dismissed. 

15As a matter of procedural fairness, absent circumstances militating strongly to the contrary, I generally am minded to accede to reasonable requests by counsel for further time to address a matter of some complexity.  Not only is the granting of such a request in the interests of counsel’s client, it is often also in the interests of the Court and the administration of justice more generally, in that it results in the Court being better assisted by counsel either through the making of more comprehensive submissions or through the making of appropriate concessions.  Here, the issues are not straightforward and they have only come to light relatively recently.  In saying that, I make no criticism of the plaintiffs’ solicitors for not raising the matters in question until 25 August 2022.  It was incumbent upon the defendants and those standing behind them, not the plaintiffs, to ascertain whether the steps leading up to Mr Bell’s appointment were legally valid and would have the desired effect. 

16In the present case, in addition to providing the defendants’ counsel with the opportunity to address the matters in issue more thoroughly, I consider there to be further circumstances militating in favour of the granting of an adjournment.  First, irrespective of the outcome of the summons application today, it seems to me that it will be necessary for this matter to come back for directions in the near future for the purpose of dealing with the other procedural aspects to which I have referred, particularly in relation to pleadings by both sides.   That is, regardless of the fate of the summons today, the matter will have to come back.  And regardless of the fate of the summons today, the matter cannot move forward until those other issues are dealt with, which will require further time – for example in relation to addressing the issue of the vesting order made by her Honour Judge A Ryan and the consequences thereof in relation to the foreshadowed counterclaim by Pickelhaube.  Secondly, the adjournment sought is not a particularly long one.  Thirdly, when the matter comes back, the 28-day period for the trustee to respond to Mr De Luca’s disclaimer request will have elapsed.  If the trustee’s response is a refusal to disclaim the shares, it seems likely that many of the arguments raised today will become hypothetical and the fate of the summons may well become clear, subject to any submissions the parties wish to make on the next occasion. 

17In the aforementioned circumstances it also seems to me that the potential prejudice to the plaintiffs of granting the adjournment sought is very minimal.  If the summons is dismissed today, the parties will be back here in the near future to deal with the other procedural matters.  If the summons is not dismissed today, the parties will be back here in the near future to deal with the other procedural matters.  The only difference is that in the latter case they will perhaps also be dealing with some residual submissions in relation to the validity of the summons.  This might ultimately not even occur, if for example the defendants make a decision in the meantime to withdraw the summons after their counsel have had the opportunity of giving it fuller consideration, or if for example the trustee refuses the disclaimer and the defendants determine to withdraw the summons as a result.  Furthermore, if the plaintiffs are correct in their position that the summons should be dismissed, it will be open to the Court to reach that conclusion and make the necessary orders at that hearing; by adjourning the summons, the Court is simply deferring, rather than foreclosing, the plaintiffs’ attempt to have the summons dismissed.

18Finally, it seems to me that granting the adjournment sought is consistent with the objects in s9(1) of the Civil Procedure Act 2010. In particular, I consider that giving the defendants’ counsel the opportunity which they seek to consider the issues and properly prepare their submissions, to be consistent with the object of the just determination of the matter in s9(1)(a). I do not consider that course to give rise to inefficiency or delay of a kind which would result in the factors in ss9(1)(c), (d), (e) or (f) outweighing the need for the just determination of the matter. Indeed, it might be said that the efficient conduct of the Court’s business and efficient use of judicial resources would have been better achieved by the plaintiffs acceding to the adjournment application. Had they done so, this hearing would not have been required and the matter could have been dealt with on a future occasion after at least some of the factual matters have crystallised and the defendants and their advisers have had an opportunity to work through the implications of Mr Bell’s invalid appointment.

19For all of these reasons, I propose to accede to the defendants’ application to adjourn the summons and directions hearing and, unless the parties wish to be heard otherwise, to reserve the question of costs to be determined at the adjourned hearing.