Michael J Drapac v Ashley J Wain
[2013] VSCA 19
•13 February 2013
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2012 0113
| MICHAEL J DRAPAC & ORS | Applicants |
| v | |
| ASHLEY J WAIN & ORS | Respondents |
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| JUDGES | NEAVE JA and VICKERY AJA |
| WHERE HELD | MELBOURNE |
| DATE OF HEARING | 1 February 2013 |
| DATE OF JUDGMENT | 13 February 2013 |
| MEDIUM NEUTRAL CITATION | [2013] VSCA 19 |
| JUDGMENT APPEALED FROM | Wain & Ors v Drapac & Ors [2012] VSC 156 (Ferguson J) |
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STAY – Application for stay on execution of judgment pending appeal – Principles – Whether real risk that appeal will be rendered nugatory – Meaning of ‘real risk’ – Rules 64.25 and 66.16 of the Supreme Court (General Civil Procedure) Rules – Onus under rr 66.16 and 64.25 – Finding of ‘special or exceptional circumstances’, nevertheless discretion exercised against a stay in the circumstances of the case – Stay refused.
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| APPEARANCES: | COUNSEL | SOLICITORS |
| For the Applicants | Mr P B Murdoch QC and Mr A P Trichardt | BSB Lawyers |
| For the Respondents | Mr I G Waller S.C. with Mr H L Redd | Isakow Lawyers |
NEAVE JA:
VICKERY AJA:
By Summons filed 29 November 2012, the appellants seek a stay of Ferguson J’s orders made on 1 June 2012 in proceeding S CI 2010 1061 that the appellants pay the respondents’ costs in the proceeding. The costs in the proceeding have been taxed in the sum of $650,000.
Background
At the trial on liability, the respondents sought, and were granted, orders pursuant to s 233 of the Corporations Act (‘the Act’)[1] that the appellants purchase the respondents’ shares. The proceeding continues in relation to the valuation of the shares.
[1]Corporations Act 2001 (Cth) s 233.
Mr Drapac, the first appellant, operates a property development and investment business through a number of companies and trusts that he controls (‘the Drapac Group’). Mr Drapac employed Mr Wain, the first respondent, and Mr Murchie, the fourth respondent, to work in his companies.
Between 2004 and 2006, Mr Wain and Mr Murchie were issued with shares in two companies, Endoline Pty Ltd (‘Endoline’) and Drapac Management Ltd (‘Drapac Management’), and units in trusts that form part of the Drapac Group. Mr Wain holds a 13.5% interest and Mr Murchie a 3.5% interest in the relevant entities.
The relationship between Mr Drapac and Messrs Wain and Murchie deteriorated. Mr Wain’s employment was terminated in October 2009 and Mr Murchie resigned in December 2009.
Proceeding before Ferguson J
In the proceeding, Mr Wain and Mr Murchie sought orders under s 233 of the Act for the purchase of the shares and units registered in their name by Mr Drapac and entities that he controls.
Section 233 provides that the Court can make an order:
for the purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law.[2]
[2]Corporations Act 2001 (Cth) s 233.
Section 232 provides grounds for an order under section 233, including where the conduct of the company’s affairs is:
oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.[3]
[3]Corporations Act 2001 (Cth) s 232.
The trial, which was confined to the question of liability, occupied 19 days from May to August 2011 (‘the Liability Proceeding’). On 26 April 2012, Ferguson J delivered reasons for judgment in favour of the respondents (the ‘Reasons’).[4] Orders were pronounced on 1 June 2012 (‘the Orders’).[5] The proceeding continues in relation to the valuation of shares and units issued to the respondents (‘the Valuation Proceeding’).[6]
[4]Wain & Ors v Drapac & Ors [2012] VSC 156.
[5]Order made by Justice Ferguson on 1 June 2012.
[6]Wain & Ors v Drapac & Ors [2012] VSC 156 [8].
Her Honour identified several principal issues for consideration in the Liability Proceeding. First, whether the respondents were beneficially entitled to the shares and interests registered in their names, or whether the respondents held them for the benefit of entities controlled by Mr Drapac.[7] Second, whether there had been oppressive conduct entitling the respondents to the relief sought.[8] Third, whether Mr Wain and Mr Murchie had breached their employment contracts and duties as directors.[9]
[7]Wain & Ors v Drapac & Ors [2012] VSC 156 [5].
[8]Wain & Ors v Drapac & Ors [2012] VSC 156 [6].
[9]Wain & Ors v Drapac & Ors [2012] VSC 156 [7].
Her Honour determined the issues as follows:
(a) Firstly, the shares and units were held beneficially by the respondents.
(b) Secondly, the conduct of the affairs of the appellants was oppressive and unfairly prejudicial to Mr Wain and Mr Murchie.
(c) Thirdly, Mr Wain and Mr Murchie did not breach their employment contracts.[10]
[10]Wain & Ors v Drapac & Ors [2012] VSC 156 [9].
On 1 June 2012 her Honour ordered the appellants to purchase the respondents’ shares and interests at a value to be determined by the Court. The counterclaims were dismissed. The appellants were ordered to pay the respondents’ costs up to and including 1 June 2012, with some exceptions (‘the Ferguson J order’).[11]
[11]Order made by Justice Ferguson on 1 June 2012.
Costs of the proceeding
The respondents issued a summons for taxation of costs and served a bill of costs in taxable form. The bill of costs totalled $953,537.48.
On 4 December 2012, following the issue of the summons in the present application on 29 November 2012, Costs Registrar Conidi ordered that the bill of costs be taxed in the sum of $650,000 and ordered the amount to be paid into an interest bearing controlled money account within seven days. The order was made by consent in settlement of the taxation of costs. Pursuant to the order, the appellants paid the amount of $650,000 into a Commonwealth Bank account controlled by the parties’ solicitors on 11 December 2012. The following is recorded in ‘Other Matters’ in the order of Costs Registrar Conidi:
Other matters: The parties agree to stay payment to the Applicants of the costs taxed herein and deposited into the interest bearing controlled money account as provided by Order 2 herein pending an Order of the Court / Court of Appeal, agreement between the parties or withdrawal of the Summons by the Respondents in the Court of Appeal Proceeding No. SAPCI 2012/0113 dated 29 November 2012.
Accordingly, the arrangement entered into by the parties in respect of the deposit monies may be varied by the Court of Appeal pursuant to their agreement.
Application for a Stay
By Summons filed 29 November 2012, the appellants seek an order that the Ferguson J order be stayed until the hearing and determination of the appeal. The appellants also seek an order that they pay the amount of the taxed costs into an interest bearing deposit. As to the order made by Costs Registrar Conidi on 4 December 2012 that the amount of the taxed costs be paid into an interest bearing deposit we will consider whether this order should be varied or vacated in the context of considering this application for stay of execution.
Principles applicable to stay of execution
Generally, an appeal does not operate as a stay of execution or of proceedings under the decision appealed from. Rule 64.25 of the Supreme Court (General Civil Procedure) Rules (the ‘Rules’) provides:
64.25. Stay of execution
Except so far as the Court of Appeal or a Judge of the Court, or an Associate Judge, as the case may be otherwise orders-
(a)an appeal shall not operate as a stay of execution or of proceedings under the decision appealed from;
(b)no intermediate act or step shall be invalidated.
Rule 64.25 works alongside its companion r 66.16 and provides a specific power to stay execution of a judgment in the following terms:
66.16. Stay of execution
The Court may stay execution of a judgment.
In order for the Court to exercise its discretion inherent in both r 64.25 and r 66.16, the applicant (in this case, the appellants) must demonstrate that there are special or exceptional circumstances that justify departing from the position that a successful party is entitled to the fruits of its judgment.[12] Appellate courts have a wide discretion in deciding whether or not to grant a stay of execution.[13]
[12]Cellante v G Kallis Industries Pty Ltd [1991] 2 VR 653, 657 (Young CJ); Maher v Commonwealth Bank of Australia [2008] VSCA 122 [20] (Dodds-Streeton JA); Scarborough v Lew's Junction Stores Pty Ltd [1963] VR 129.
[13]Attorney-General v Emerson (1889) 24 QBD 56; affirmed in Joskovitz v Bonnick [1964] VR 654.
Whilst there is no rigid formula to be applied in each case as to how the discretion shall be exercised,[14] there are matters that are commonly accepted as relevant to the determination of whether special circumstances have been established, namely:[15]
(a) the prospect of success on appeal, which is to be assessed ‘in a fairly rough and ready way’;[16] and
(b) the risk of an appeal being rendered nugatory.
[14]King v Commercial Bank of Aust (1920) 28 CLR 289, 292 (Rich J).
[15]1-5 Grantham Street Pty Ltd v Glenrich Builders Pty Ltd [2008] VSCA 228 [14] (Redlich JA and Hargrave AJA).
[16]Jackamarra v Krakouer (1998) 195 CLR 516, 522 (Brennan CJ and McHugh J); followed in Interactive Network Services Pty Ltd v NPV WA Securities Pty Ltd [2006] VSCA 225 [14] (Neave JA).
In Cellante v G Kallis Industries Pty Ltd[17] Young CJ stated that special circumstances would exist where:
[F]or whatever reason, there is a real risk that it will not be possible for a successful appellant to be restored substantially to his former position if the judgment against him is executed.[18]
[17][1991] 2 VR 653.
[18]Ibid at 657.
As expressed by the Court of Appeal[19] in Gangemi v Osborne,[20] the concept is typically expressed as the risk where, if an appellant was successful on appeal, it would be denied the fruits of the appeal, or substantially so, if a stay is not ordered.
[19]Warren CJ and Neave JA.
[20][2008] VSCA 221 at [14], citing Maher v CBA [2008] VSCA 122.
In submissions, each party relies on the articulation of principles relating to stay applications in the recent Court of Appeal case of Neate v Thoroughbred International Marketing Pty Ltd (‘Neate’).[21] In that case, Mandie JA and Cavanough AJA provide further clarification of the principles. Their Honours stated that:
…even after the threshold of special or exceptional circumstances has been crossed by the applicant, a discretion falls to be exercised. If, despite the special or exceptional circumstances, the grant of a stay would cause serious injustice to the respondent, the Court might well refuse a stay. But if refusing a stay would cause even greater injustice to the applicant, the Court might decide to grant the stay.[22]
[21]Neate v Thoroughbred International Marketing Pty Ltd [2012] VSCA 65.
[22]Neate v Thoroughbred International Marketing Pty Ltd [2012] VSCA 65 [11].
In relation to the strength of the appeal, their Honours adopted the comments made in Maher v Commonwealth Bank of Australia (‘Maher ‘)[23] that a stay should not be granted unless there is at least an arguable ground of appeal, and added:
We note that on an application for a stay in a heavy factual case such as the present, this Court will usually not have the evidentiary materials necessary to consider the merits of the grounds of appeal in any detail (and that is the situation here). Indeed, unless it appears that there is no reasonable ground of appeal or that the appeal is not bona fide, the Court will generally focus on the matters relevant to the enforcement of the judgment in question rather than matters relevant to its validity or correctness.[24]
[23]Maher v Commonwealth Bank of Australia [2008] VSCA 122.
[24]Neate v Thoroughbred International Marketing Pty Ltd [2012] VSCA 65 [8].
As to the onus under r 66.16 and r 64.25, it was submitted by the applicants that, given the state of the financial position of the respondents as demonstrated by the evidence, an evidentiary onus passes to those parties to demonstrate that there was no real risk of at least part of the appeal relating to costs being rendered nugatory.
We do not accept this position.
The evidentiary onus remains with the applicants to establish ‘special or exceptional circumstances’ that justify departing from the position that a successful party is entitled to the full benefit of a judgment at first instance.[25]
[25]Gangemi v Osborne [2008] VSCA 221 at [12].
However, once it is established that the threshold of special or exceptional circumstances has been made out by an applicant, applying the approach of the Court of Appeal in Neate, a discretion falls to be exercised. If, despite the special or exceptional circumstances, the grant of a stay would cause serious injustice to the respondent, the Court might well refuse a stay. In such a case, an evidentiary onus may be said to fall on the respondent to an application to justify why the discretion of the Court should be exercised against the grant of a stay, even though special or exceptional circumstances have been established by the applicant.
Grounds of Appeal
The appellants filed a lengthy Notice of Appeal on 15 June 2012 advancing 27 grounds of appeal. The appellants seek to overturn the decision of the learned trial Judge, both in respect of the substantive relief granted to the respondents, but also in respect of the dismissal of the counterclaims.
The grounds of appeal for convenience have been grouped below:
Grounds concerning beneficial entitlement to the shares and units
(a) Ground 1: Ferguson J erred by inferring that Mr Drapac’s intention when he signed the share and unit certificates was to transfer beneficial ownership of the shares and units.
(b) Ground 2: Ferguson J erred in finding that the respondents were the beneficial owners of the shares and units registered in their names.
(c) Ground 3: Ferguson J erred in finding that the Court was not required to look at whether there was a contract for the transfer, issue or allotment of the shares and units.
(d) Ground 4: Ferguson J erred in finding that there was satisfactory evidence that the respondents gave consideration for the shares and units registered in their names.
Grounds concerning entitlement to the relief sought
(e) Ground 5: Ferguson J erred in finding that the conduct of the affairs of the appellant entities meant that the respondents were entitled to the relief sought.
(f) Ground 7: Ferguson J erred by exercising her discretion in granting relief to the respondents.
(g) Ground 8: Ferguson J erred by exercising her discretion in granting relief to the respondent companies against two of the appellant entities.
(h) Ground 10: Ferguson J erred in finding that corporate structure of the Drapac Group was similar to that in Vigliaroni v CPS Investments Holdings Pty Ltd (‘Vigliaroni’).[26]
[26]Vigliaroni v CPS Investments Holdings Pty Ltd (2009) 74 ACSR 282.
(i) Ground 11: Ferguson J erred in following the decision in Vigliaroni in holding that there was power to grant relief in respect of unit holdings and thereby concerning assets that a corporate trustee holds on trust.
Grounds concerning oppressive or unfairly prejudicial conduct
(j) Ground 6: Ferguson J erred in finding that the alleged conduct of the affairs by the appellant entities, considered generally and taken cumulatively, was oppressive or unfairly prejudicial to respondents.
(k) Ground 9: in reaching the finding that the conduct was oppressive, Ferguson J erred in finding that the Court:
(i) could consider the cumulative effect of conduct;
(ii) should make orders that would address the overall harm;
(iii) could make orders for the purchase of units in trust; and
(iv) could grant relief under the provisions of the Act in respect of trusts and registered managed investment schemes, notwithstanding that the majority of members of the registered managed investment schemes were not parties to the proceeding.
(l) Ground 16: Ferguson J erred in finding that the termination of Mr Wain’s employment was not justified and formed part of the conduct which constituted oppressive conduct.
(m) Ground 17: Ferguson J erred in finding that the provision and continuation of a financial facility after the termination of Mr Wain’s employment formed part of the oppressive or unfairly prejudicial conduct.
(n) Ground 18: Ferguson J erred in finding that a suggestion made in a meeting regarding the issue of capitalisation of Drapac Management and Endoline and the dilution of shares and units was part of conduct which was oppressive or unfairly prejudicial to the respondents.
(o) Ground 19: Ferguson J erred by applying the same test to determine whether the termination of Mr Wain’s employment constituted oppressive conduct as that for assessing whether Mr Wain had breached his employment contract and general statutory duties.
(p) Ground 20: Ferguson J erred in finding that the removal of Mr Wain as director formed part of the conduct that constituted oppressive conduct.
(q) Ground 21: Ferguson J erred in finding that Mr Murchie’s employment was ‘constructively terminated’ and that his resignation was brought about by conduct that constituted oppressive conduct.
Grounds concerning diversion of business opportunities
(r) Ground 12: Ferguson J erred in finding that Mr Wain did not pursue an opportunity to acquire the Kew properties for his own benefit at the expense of the Drapac Group.
(s) Ground 13: Ferguson J erred in finding that Mr Wain did not divert a property acquisition opportunity away from the Drapac Group to First Urban and stand to gain personal benefit out of the sale of the Cobden St property.
(t) Ground 14: Ferguson J erred in finding that Mr Wain did not attempt to divert an opportunity from the Drapac Group to acquire the Church St property.
(u) Ground 15: Ferguson J erred in finding that neither Mr Wain nor Mr Murchie breached their duties to Drapac Management in respect of the proposed acquisition of the Fortitude Valley property.
Grounds which complain of the trial judge’s observations about the witnesses
(v) Ground 24: Ferguson J erred in finding that Mr Drapac’s evidence could not be relied upon.
(w) Ground 25: Ferguson J erred in finding that Ms Weston’s oral testimony was rehearsed and unreliable, and in drawing inferences against her that were not reasonably open on the evidence.
(x) Ground 26: Ferguson J erred in finding that Mr Wain was a reliable witness.
(y) Ground 27: Ferguson J erred in finding that Mr Murchie was an honest and reliable witness.
Other grounds
(z) Ground 22: Ferguson J erred in finding that the evidence was insufficient to support the counterclaims.
(aa) Ground 23: Ferguson J erred in finding that the National Australia Bank would have provided funding to settle the Le Boulevard purchase.
Prospect of success on appeal
Like Maher, this is a ‘heavy factual case’. The Liability Proceeding occupied many hearing days and the reasons for judgment are lengthy. The appellants’ grounds of appeal cover all of the main issues identified by the Ferguson J. The evidence required to measure the prospect of success on appeal is likely to be substantial. Accordingly, the observation of Cavanough AJA in Neate that unless it appears that there is no reasonable ground of appeal or that the appeal is not bona fide, the Court will generally focus on the matters relevant to the enforcement of the judgment,[27] becomes acutely pertinent.
[27]Neate v Thoroughbred International Marketing Pty Ltd [2012] VSCA 65 [8].
The appellants submit that the grounds of appeal demonstrate that the appeal is ‘not based on speculation, but rather is based on reasonable and arguable grounds’ and is bona fide. The respondents make no submission as to the prospect of success of the appeal.
In our opinion, without the advantage of further and detailed submissions on the issue, on the material before the Court on this application it is not possible at this stage to conclude that there is no reasonable ground of appeal or that the appeal is not bona fide, and we proceed on this basis.
Real risk of the appeal being rendered nugatory
The parties’ submissions and affidavit material focus on the financial position of the respondents.
The threshold question in the present application is whether there is a real risk of the appeal, or a substantial part thereof, being rendered nugatory by reason of the financial position of the respondents. A ‘real risk’ in this context means a risk established by the evidence. Commercial activity of all kinds may carry with it an element of risk, and litigation in the commercial sphere is clearly attended with risk. However, the mere possibility of risk, even if present, may not constitute a ‘real risk’ for the purposes of determining an application made under r 66.16 and r 64.25 of the Rules.
For the purposes of this application, we consider that given the agreed costs on taxation amounted to the large sum of $650,000, and that this award is liable to be set aside in the event of a successful appeal, this comprises a substantial part of the judgment in issue in the appeal.
Applicants’ Submissions
The applicants submit that, if successful on appeal, they will not be restored substantially to their former position. The appellants outline the following information in relation to the financial position of the respondents:
(a) Mr Wain does not own any real property and had taxable income for 2007 of $86,982. Mr Wain’s home is registered in his wife’s name and is subject to a caveat in favour of Isakow Lawyers, the lawyers who represented the respondents in the Liability Proceeding. The Wain Family Trust has a debit balance exceeding $1,000,000 as at 29 April 2011;
(b) the second respondent has virtually no assets, partly because it owes a sum of $801,854 to Drapac Holdings Trust (a unit trust mostly owned and controlled by Mr Drapac);
(c) the third respondent has no capital and no real property;
(d) Mr Murchie owns no real property and had a taxable income for 2010 of $157,369; and
(e) the fifth respondent generates little net profit and holds virtually no assets, some of which are subject of the appeal.
Mr Sweeney, the solicitor acting on behalf of the appellants, estimates that the appellants’ costs of the appeal will be approximately $200,000[28] and the costs of the Valuation Proceeding will be approximately $300,000.[29] It is submitted that if the appellants are successful on appeal, it is reasonable to infer that the respondents would use the taxed costs of the Liability Proceeding to discharge the unpaid legal costs for the payment of the cost of the appeal and the Valuation Proceeding.
[28]Affidavit of Matthew Dominic Sweeney sworn 29 November 2012, [10].
[29]Affidavit of Matthew Dominic Sweeney sworn 29 November 2012, [9].
The appellants relied on Andrews v John Fairfax & Sons Pty Ltd,[30] in which Maxwell J determined that the applicants (who were defendants in the proceeding below) were entitled to a stay of execution in circumstances where it could be inferred that ‘the plaintiffs would discharge their [costs] obligations…from the verdict moneys’ and ‘there would be no reasonable probability of the defendants getting the whole of the damages back, should the appeals succeed’.[31]
[30]Andrews v John Fairfax & Sons Pty Ltd [1979] 2 NSWLR 184.
[31]Andrews v John Fairfax & Sons Pty Ltd [1979] 2 NSWLR 184, 188.
Respondents’ Submissions
The respondents have filed submissions which are confined to Mr Wain’s ability to repay the taxed costs of $650,000, should the appellants succeed on the appeal. The respondents provide the following information regarding their finances:
(a) Mr Isakow deposed that his firm is prepared to withdraw its caveat over Mr Wain’s property; and
(b) Mr Wain’s wife, Kathryn Wain, deposed that there is equity in their home of approximately $963,000 and she is prepared to offer the appellants security over the property to the value of $650,000.
The respondents also rely upon the affidavit of their solicitor, Daniel Isakow of 17 December 2012.
Mr Isakow swears that he has a caveat in his favour over the property at 4 Brook Street, Hawthorn, in the State of Victoria. Kathryn Mary-Ellen Wain, the wife of Ashley John Wain, is the registered proprietor of the property. He lodged the caveat to protect his interest created by the Deed of Charge as security in anticipation of costs and disbursements incurred by Mr Wain in relation to this proceeding. Mr Isakow says that he is prepared to provide:
(a) a withdrawal of caveat over the property, and not lodge any fresh caveat over the property; and
(b) cancel the Deed of Charge.
In support of this position, at the hearing of the application, Mr Isakow proffered the undertaking to the Court, through the respondents’ counsel.
Reliance was also placed on the affidavit of Mr Wain’s wife, Kathryn Wain. She gave evidence that she is the registered proprietor of the property situated at 4 Brook Street, Hawthorn in the said State being the land contained in Certificate of Title Volume 3030 Folio 080 (the ‘Property’). In May 2012, she had the property valued by Hay Property Group who valued the property at $2.75 million as at 28 May 2012. The valuation was in writing and exhibited to her affidavit. This comprised the only evidence of the value of the Property before the Court. Kathryn Wain also swore that the Property is mortgaged to the amount of $1,787,000.00. There are no arrears of mortgage payments. On 30 January 2012, she says that she signed a charge agreement with Daniel Isakow permitting him to lodge a caveat over the Property. She understood that the caveat was to secure costs and disbursements in favour of Daniel Isakow as a result of legal work he was carrying out for her husband. She says further that she has spoken with Daniel Isakow regarding the caveat and understands that he is prepared to provide her with a withdrawal of caveat.
Kathryn Wain also deposes that she is prepared to offer the applicants security over the Property to the value of $650,000.00 in order to satisfy their concerns regarding the ability of her husband to repay the amount of $650,000.000 should the appellants’ appeal in this proceeding be successful. She says that in offering the security, she has obtained independent legal advice from a solicitor, Alan Goldstone, a Partner of Tisher Liner & Co of 2/333 Queen Street, Melbourne.
In further support of this position, at the hearing of the application, Kathryn Wain proffered the following undertaking to the Court, through the respondents’ counsel, namely she will:
(i) not, pending the hearing and determination of the appeal or further order, sell or otherwise further encumber the Property, and shall not permit any further draw‑downs on any loan secured by the present mortgage on the Property; and
(ii) in the event that the Court of Appeal orders that the costs of the trial be repaid by the respondents, forthwith execute a charge, with a power of sale in the event of default, in favour of the appellants over the Property in the sum of $650,000 together with interest on that amount calculated from the date on which the sum of $650,000 is paid by the appellants until the date on which that amount is repaid by the respondents at a rate of 4% above the average cash rate published by the Reserve Bank of Australia during that period.[32]
[32]The charge referred to in the undertaking is to apply to a default on the part of any of the respondents.
Accordingly, the respondents submit that the evidence does not establish that the respondents would be unable to repay the $650,000 if so ordered and the discretion contained in r 64.25 is not enlivened.[33]
[33]Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 64.25.
Applicants’ Reply Submissions
We deal in this part with the reply submissions advanced by the applicants to the extent that those submissions are considered to bear upon the questions in issue and remain alive and relevant following the hearing of the application.
As Mr Murchie has not put on any evidence regarding his financial position, or that of his related entity, Murchie Investments Pty Ltd, the Court accepts the evidence of the applicants on the question, contained in the affidavit of Mr Sweeney dated 29 November 2012.
In relation to Mr Wain, the Court accepts that his current financial position is no better than that set out in Mr Sweeney’s affidavit.
Although the respondents’ solicitor, Mr Isakow, is prepared to give up his security for the payment of his fees, which are estimated to approximate $930,000, there is no direct evidence as to the quantum of fees which are currently outstanding to Mr Isakow or his firm, or the arrangements, if any, for payment. On this issue, no conclusions beyond speculation are open to be drawn.
Nevertheless, we find that, as things stand at present, and on the assumption that the respondents are paid the costs in the sum of $650,000 presently held in the interest bearing account pursuant to the Order of the Costs Registrar, there is a real risk of them being unable to repay those costs, should the applicants be entirely successful in their appeal.
As to the undertaking which Mrs Wain has given to the Court through the respondents’ counsel, the applicants sought to take issue with the valuation placed on her home, and on this basis questioned the value of the security which she was prepared to give pursuant to the undertaking.
In May 2012, Mrs Wain had her property valued by Hay Property Group which valued the property at $2.75 million as at 28 May 2012. As this comprised the only evidence of the value of the Property before the Court, we accept the valuation for the purposes of this application. The criticisms of the applicants that it is now some 7 months old, was on its face prepared for ‘first mortgage purposes’, and for a party other than Mrs Wain, do not in our view, without further evidence, materially detract from the likely correctness of the valuation or the conclusion that, in all likelihood, there remains an equity of about $963,000 in the Property.
Conclusion
Here there is the potential for prejudice to both parties. On the one hand, the appellants wish to prevent the $650,000 in the interest bearing account from being released to the respondents because they are concerned that that amount will not be repaid if they are successful on appeal. On the other hand, the respondents are entitled to benefit from the costs order made in their favour unless the Court is satisfied that there are special or exceptional circumstances that justify departing from the position that a successful party is entitled to the fruits of its judgment. Further, although there was no direct evidence on the point, it was submitted on behalf of the respondents that it ought to be inferred that it may be difficult for the respondents to defend the appeal or meet their costs in the Valuation Proceeding without access to the $650,000. Given the state of the evidence on this matter, we do not regard this as a compelling submission. It suffers from a notable lack of support in the material, with no explanation for the evidence not being provided, when it could well have been supplied, had the position been as suggested in the respondents’ submissions.
In our view, the threshold of ‘special or exceptional circumstances’ has been met by the appellants. The evidence as to the financial circumstances of the respondents does establish that, as things stand at present, there is a real risk that they would be unable to repay the $650,000 if so ordered following the hearing of the appeal, assuming those monies were made immediately available to them. Accordingly, there is a real risk of that part of the appeal relating to costs being rendered nugatory by reason of the financial position of the respondents. Given the quantum of the costs awarded to the respondents, this comprises a substantial part of the appeal. So much is established by the evidence.
However, in the exercise of the Court’s discretion in the matter, inherent in r 66.16 and r 64.25, it would be unjust to order the stay which is sought and deny the respondents the immediate benefit of the order as to costs made in their favour. Three considerations give rise to this outcome.
First, the undertaking offered and given by Mr Wain’s solicitor releasing the respondents from the security for payment of the fees due to his firm, and the undertaking offered and given by Mr Wain’s wife in respect of her home, go some considerable way towards negating the likelihood that the appellants will not be restored to their former position once this regime is put in place, should they succeed in the appeal.
Second, at its highest, only part of the subject matter of the case is exposed to the risk of being rendered ineffective in the event that the appeal succeeds, namely that part which relates to the costs order. Although the costs as agreed in the taxation in the sum of $650,000 were large, the substantive relief granted to the respondents in the Liability Proceeding, whereby the appellants were ordered to purchase the respondents’ shares and interests at a value to be determined by the Court, together with the dismissal of the counterclaims, may be overturned on appeal, with the further result that the appellants will avoid the Valuation Proceeding. These potential outcomes, which in themselves constitute substantial potential fruits of the appeal, remain unaffected by any risk posed by the financial position of the respondents and are not exposed to any risk of being rendered nugatory.
Third, it is entirely possible that, although the appeal may be wholly successful, it is also possible that the appeal may be only partly successful.
For example, the substantive relief obtained by the respondents in the Liability Proceeding, may be set aside, but may be substituted for other relief available under s 233 of the Corporations Act. In this regard, is to be noted that it was contended by the Drapac parties in the Liability Proceeding that if the Court formed the view that what occurred resulted in some loss, then an order could be made to address that loss rather than to go to the drastic step of ordering a purchase of shares or units.[34] Further, in relation to units in the relevant trusts, the Drapac parties contended that the correct approach was for the unit holders to make an application for redemption of their units and for that redemption to be considered by the trustee.[35]
[34]Reasons at [290].
[35]Reasons at [291].
Relief available to be granted under s 233 of the Corporations Act calls for the exercise of a discretion on the part of the Court.
Another possibility is that the substantive relief obtained by the respondents in the Liability Proceeding, may be wholly set aside, with the counterclaims of the applicants remaining dismissed.
Outcomes of this kind, resulting in only partial success for the applicants, may well have a bearing on the quantum of costs which may be ultimately awarded following the appeal, arising from the further exercise of the discretion of the Court of Appeal to be made on the question of costs.
In this case, liability for costs, and the measure of costs, are not matters which are able to be foreshadowed at this stage. Given the considerable ambit of possible costs orders which may ultimately be ordered, it would be unjust to the respondents to proceed on the assumption that the appeal will result in them being denied the whole of the costs awarded in their favour in the Liability Proceeding, even if the appellants ultimately enjoy a measure of success. Equally possible is a costs outcome which, at least in significant part, results in the costs order made at first instance being preserved in favour of the respondents.
Following the hand down of judgment, the Court heard submissions on costs. The Court proposed to make an order that the applicant pay the respondents’ costs of the application. Counsel for the applicant submitted, however, that in the special circumstances of this application, the Court should either make no order as to costs or that the costs should abide the outcome of the appeal. In making that argument, he submitted that the Court would not have made the orders sought if the relevant undertakings had not been given by the third parties and that the original undertakings were substantially modified during the course of argument.
Counsel for the respondent submitted that the normal rule that costs follow the event should apply and that there was no basis for departing from that position. While it was true that the form of undertakings was modified during the course of the hearing, objections were raised as to the form of the undertakings in the reply submissions, which were only filed on the morning of the hearing.
We note that in paragraphs 58 to 60 above, the undertakings given by Mrs Wain and Mr Isakow were not the sole basis for the rejection of the application. It is not necessary for us to repeat the other reasons for doing so, which are set out in those paragraphs.
Nevertheless, there are some uncertainties as to the likely outcome of the appeal, including the possibility that the applicant might succeed in part, which are discussed above. In these circumstances, the Court would order that the costs of the application be costs in the appeal.
Orders
In our opinion, the application of the appellants made by the Summons dated 29 November 2012 should be dismissed.
Further, the order made by Costs Registrar Conidi on 4 December 2012 should be varied to give effect to these reasons, thereby enabling the respondents to have direct access to their costs award.
The Orders of the Court are:
Upon the undertakings described in these reasons being given to the Court of Appeal by Daniel Isakow and Kathryn Mary-Ellen Wain by counsel for the respondents on 1 February 2012:
1. The application of the appellants made by the Summons dated 29 November 2012 be dismissed.
2. Order 2 of the orders made by Costs Registrar Conidi on 4 December 2012 be set aside.
3. The costs of the application be costs in the appeal.
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