Shanahan (Trustee) in the matter of O'Neill (Bankrupt) v 250 East Property & Building Pty Ltd (No 2)
[2022] FedCFamC2G 1039
•13 December 2022
Federal Circuit and Family Court of Australia
(DIVISION 2)
Shanahan (Trustee) in the matter of O’Neill (Bankrupt) v 250 East Property & Building Pty Ltd (No 2) [2022] FedCFamC2G 1039
File number(s): ADG 265 of 2022 Judgment of: JUDGE BROWN Date of judgment: 13 December 2022 Catchwords: BANKRUPTCY – final application pursuant to section 139A of the Bankruptcy Act – supply of personal service by bankrupt to joint development – allegation of deferred remuneration due to entity related to bankrupt – namely family trust and related corporate trustee – interlocutory application to restrain appointment of trustee and distribution of proceeds of sale of development to other entities – has applicant established prima facie case – balance of convenience – applicant seeks substituted service of application and orders on bankrupt – matters to be considered Legislation: Australian Securities & Investments Commission Act 2001 (Cth)
Bankruptcy Act 1966 (Cth) ss 5, 30(1)(b), 139A, 139CA, 139D
Federal Circuit and Family Court of Australia Act 2021 (Cth) s 140
Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 Div 6.4, rr 6.14, 6.15
Worker’s Liens Act 1893 (SA)
Cases cited: Australian Broadcasting Corporation v O’Neill (2006) 229 ALR 457
Australian Coarse Grains Pool Pty Ltd v The Barley Marketing Board of Queensland (1982) 57 ALJR 425
Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618
Lerret Holdings Pty Ltd v O’Neill & Ors (Supreme Court of South Australia, Judge Bochner, 3 February 2021), SCCIV-20-436
Pattison (Trustee of the Bankrupt Estate of Karas) v Commoore Pty Ltd & Ors [1998] FCA 350
Re Bayles; Ex parte Official Trustee in Bankruptcy (1987) 73 ALR 455
Shanahan (Trustee) in the matter of O’Neill (Bankrupt) v 250 East Property Pty Ltd [2022] FedCFamC2G 884
Division: Division 2 General Federal Law Number of paragraphs: 150 Date of hearing: 24 November 2022 Place: Adelaide Counsel for the Applicant: Mr Dal Cin Solicitor for the Applicant: Townsends Solicitors Counsel for the First and Fourth Respondents: Mr McCarthy Solicitor for the First and Fourth Respondents: Visintin Legal & Advisory Second and Third Respondent: No appearance ORDERS
ADG 265 of 2022 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 2)
BETWEEN: JOHN GERVASE SHANAHAN AS TRUSTEE FOR THE BANKRUPT ESTATE OF RODNEY JOHN O'NEILL AND DENISE KAY O'NEILL
Applicant
AND: 250 EAST PROPERTY & BUILDING PTY LTD ACN 624 848 620
First Respondent
250 EAST PTY LTD ACN 168 080 091
Second Respondent
RODNEY JOHN O'NEILL (and another named in the Schedule)
Third Respondent
order made by:
JUDGE BROWN
DATE OF ORDER:
13 December 2022
THE COURT ORDERS THAT:
1.In lieu of personal service of the application on the third respondent herein the applicant has leave to serve the following documents on him by placing the documents in the letter box for xxx xx, xx xxx Terrace xxx in the state of South Australia, in an envelope marked to the attention of Rodney John O’Neill:
(a)Application: Bankruptcy filed 6 October 2022;
(b)Affidavit of John Gervase Shanahan filed 6 October 2022;
(c)Affidavit of Tylor Newlyn filed 6 October 2022;
(d)A copy of the judgment, Shanahan (Trustee) in the matter of O'Neill (Bankrupt) v 250 East Property Pty Ltd [2022] FedCFamC2G 884;
(e)Affidavit of Robert Nicholas Cunninghame Warden filed 27 October 2022;
(f)Affidavit of Joseph Anthony Sommariva filed 27 October 2022;
(g)Application in a Proceeding filed 18 November 2022;
(h)Affidavit of Tylor Newlyn filed 18 November 2022;
(i)Affidavit of Richard Dunstone Townsend filed 21 November 2022;
(j)Affidavit of Joseph Anthony Sommariva filed 23 November 2022;
(k)Orders of Judge Brown dated:
(i)17 October 2022
(ii)28 October 2022; and
(iii)24 November 2022
(l)A copy of the judgment, Shanahan (Trustee) in the matter of O'Neill (Bankrupt) v 250 East Property & Building Pty Ltd [2022] FedCFamC2G 1039.
2.Paragraph (1) of Orders dated 17 October 2022 is hereby discharged.
until further or other order:
3.The first, second and fourth respondents are each restrained and an injunction issues restraining each of them from disbursing any of the proceeds of the sale of the land described in the Certificate of Title Register Book Volume xx Folio xx, being Apartment xxx, xx xx Terrace xxxx in the State of South Australia to any other entity other than the registered mortgagee RMBL Pty Ltd.
4.The parties’ competing applications be fixed for final hearing on 19, 20 and 21 June 2023 at 10:00am.
5.Further consideration of the matter is adjourned to 6 February 2023 at 9:30am for trial directions to be made and for consideration of whether the matter should be referred to a process of alternative dispute resolution or mediation and whether that process should be private or court based NOTING the proceedings will be conducted face to face at Court.
Note: The form of the order is subject to the entry in the Court’s records.
Note: The Court may vary or set aside a judgment or order to remedy minor typographical or grammatical errors (r 17.05(2)(g) Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 17.05 Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth).
REASONS FOR JUDGMENT
JUDGE BROWN:
Introduction
These bankruptcy proceedings arise from the need to resolve an interlocutory issue relating to the grant of various injunctions pending the trial of the competing applications of the parties concerned. They arise in the context of a multi-million dollar property development, which fell into financial difficulties.
At this stage, the court is concerned with the probity of continuing two urgently granted ex parte injunctions,[1] which prevent a number of entities dealing with a penthouse apartment, which the applicant in the proceedings (a bankruptcy trustee) asserts is potentially subject to the bankruptcy of Mr Rodney O’Neill (“Mr O’Neill”), the third respondent, on the basis that it represents some form of deferred payment for services rendered by him, prior to his bankruptcy, arising from the development project.
[1] See Shanahan (Trustee) in the matter of O’Neill (Bankrupt) v 250 East Property Pty Ltd [2022] FedCFamC2G 884.
The legal principles germane to the granting of such injunctions are centred on the resolution of two main issues. Firstly, the plaintiff concerned must make out a prima facie case that he will be entitled to the relief sought in his application. In this case, transfer of the relevant penthouse to him.
In the past there has been much controversy regarding the strength of the case asserted at an interlocutory stage required to support the grant of an injunction. I will return to this issue in due course.
Secondly, whether the inconvenience or injury which the plaintiff would be likely to suffer, if the injunction sought was refused, outweighs or is outweighed by the injury, which the defendant would suffer, if the relevant injunction was granted.[2]
[2] See Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 at 622.
In this case, it is the position of particularly the fourth respondent that it would represent an inordinate burden on it, if it was not able to proceed to complete the development concerned by selling off the relevant apartment, in an arm’s length sale. This would avoid it incurring unnecessary interest to the financier of the project, an entity which is not a party to the current proceedings.
On the other hand, it is the position of the applicant that he faces a real prospect that his application will be rendered otiose, if the property is sold. In particular, he asserts that an entity related to the fourth respondent, namely the builder of the project concerned, Joseph Sommariva, has unilaterally engineered proceedings to create an interest in the relevant penthouse, which is designed to defeat his claim. In addition, he asserts that a number of transactions which have occurred since Mr O’Neill became bankrupt, cause him to have grave suspicions about the probity of the other actors concerned.
In these circumstances, on a final basis, the applicant seeks that any interest held by the first, second and fourth named respondents, in an apartment known as Apartment xxx, xx xx Terrace xxxx vest in him as Mr O’Neill’s Trustee in bankruptcy pursuant to the provisions of section 139D of the Bankruptcy Act 1966 (Cth).[3]
[3] Hereinafter referred to as ‘the Act’.
The factual circumstances surrounding this application and the identification of the various actors involved in it are not without their complexities. These complexities are compounded by the fact that the court has received no evidence whatsoever, from Mr O’Neill personally, who is believed to be gravely unwell at present. In these circumstances, ancillary to the Trustee’s principle application is one which relates to substituted service.
Background
The development in question involved the construction of 14 apartments at a site located at xx xx Terrace, Adelaide. The development took the form of two towers, each seven stories in height. The most expensive apartments being the penthouses, on the top floors of what has been described as the north and south towers. Each penthouse is valued at approximately $4,000,000.00.
As indicated above, the focus of these proceedings is primarily on Apartment xx. However, Apartment xx is also relevant. It is common ground between the parties concerned that the vast majority of the other apartments in the development have been sold, for proper value, to other purchasers. These units are not generally relevant to these proceedings.
Initially, the guiding hand and genius behind the project, was provided by two individuals, Mr Rodney O’Neill, the bankrupt, and Mr Joseph Sommariva, who is a builder. It is convenient to refer to Mr O’Neill and Mr Sommariva as the joint venturers.
However, as will be explained in greater detail, each of them operated their affairs, in respect of the development concerned, through personal companies and related discretionary trusts. These entities are the first, second and fourth respondents respectively – 250 East Property & Building Pty Ltd (Sommariva); 250 East Pty Ltd (O’Neill); and Pajo Projects Pty Ltd (Sommariva).
Mr Sommariva is also indirectly involved in these proceedings as a distinct entity, in his capacity as the actual builder of the development concerned, who contracted with the joint venturers to build the two towers concerned.
In this capacity, he has, in November of 2021, in effect, taken action against himself, as a joint venturer, in his capacity as the builder, to secure the payment of what he asserts are the costs incurred by him personally in the actual build of 250 East Terrace Development, pursuant to the provisions of the Worker’s Liens Act 1893 (SA).
The Trustee asserts that this is a mechanism intended to create an equitable interest in the penthouse concerned, which may potentially defeat his claim to recover monies due to a trust formally controlled by Mr O’Neill to which it was intended the joint venturers concerned would allocate profits due to them on the conclusion of the development.
In this context, other controversies arise in respect of the discretionary trust germane to Mr O’Neill – the East Terrace Trust, of which Mr O’Neill remains the sole named beneficiary and the circumstances surrounding the substitution of 250 East Property & Building Pty Ltd for 250 East Pty Ltd as its Trustee.
In general terms, Mr O’Neill can be described as a property developer, with experience in selecting sites for development; dealing with relevant authorities to secure development approval; and then marketing the developed building. In equally general terms, Mr Sommariva can be described as a commercial builder, with experience constructing relatively complex multi-storey buildings.
In the past, Mr O’Neill has conducted his business affairs, in respect of the property at xx xx Terrace, through a discretionary trust – the East Terrace Trust. The Trustee of the trust was originally a company known as 250 East Terrace Pty Ltd.[4]
[4] The Second Respondent.
Mr O’Neill is the sole named beneficiary of the trust and currently the only other class of individuals, with the potential to become eligible beneficiaries are members of his family.[5] The trust can be properly described as a discretionary trust, with the trustee authorised to be able to appoint other beneficiaries or classes of beneficiaries and make distributions to them. The relevant trustee also authorises the trustee to retire and appoint a successor.
[5] See affidavit of John Gervase Shanahan filed 13 October 2022 at page 61.
Mr O’Neill is the sole director of 250 East Pty Ltd and holds all of its issued shares. As at 23 May 2022, the company was subject to external administration. The controller is RMBL Investments Ltd.
In December 2014, 250 East Pty Ltd acquired a parcel of land at xx xx Terrace, from an adjoining hospital, for around $5,000,000.00. In November of 2016, 250 East Pty Ltd transferred 40% of its interest in the land to Pajo Protects Pty Ltd.[6] Mr Sommariva is the sole director and shareholder of Pajo Projects Pty Ltd. It too is currently subject to the control of RMBL Investments Ltd.
[6] The Fourth Respondent.
In March of 2017, the Adelaide City Council, which was the relevant development authority for East Terrace, granted Mr O’Neill a permit to demolish the existing buildings on 250 East Terrace; excavate a basement on the site; and then construct a multi-storey residential building.
On 20 March 2017, 250 East Pty Ltd and Pajo Projects Pty Ltd entered into a joint venture to develop, sub-divide and sell the land at 250 East Terrace, which they owned, in the manner likely to be the most advantageous to them. This objective was to be achieved through the construction of a seven storey apartment building, which would be divided into 14 allotments, which the joint venturers would then market and sell.
The joint venture agreement stipulated that 250 East Pty Ltd would provide 60% of the funding for the project; whilst Pajo Projects Pty Ltd would provide the remaining 40%. The joint venturers also agreed that they would enter into a building contract with Mr Sommariva to construct the development on a fixed price basis. I have not been provided with how this fixed price was to be calculated nor with any information regarding subsequent variations to it.
The joint venturers also agreed to open a project bank account from which all sums, including profits, were to be either credited or debited. Significantly, in order to operate the bank account, any expenditure and withdrawals had to be signed by at least one representative of each joint venturer.
The joint venturers also agreed that the proceeds from the development would be applied in the following way:
·Firstly, in payment of any borrowings involved;
·Secondly, in payment of all expenses incurred in carrying out the development;
·Thirdly, any remainder to be divided as to 60% to 250 East Pty Ltd and 40% to Pajo Projects Pty Ltd.
Significantly, in the context of the current controversy, the joint venturers agreed that Pajo Projects would be entitled to have transferred to it the level 7 penthouse apartment in the north tower, on the completion of the joint venture; whilst 250 East would be entitled to the transfer of the level 7 penthouse in the south tower. The value of these apartments was to be deducted from profit shares otherwise allocated by the agreement with the value to be determined at market rates.
On 16 February 2018, 250 East Pty Ltd and Pajo Projects Pty Ltd borrowed an initial sum of $3,900,000.00, which would increase to $27,000,000.00, as the construction of the development progressed, from RMBL Investments Limited. This sum was secured by way of a registered mortgage on the title of the land situated at 250 East Terrace. On 10 November 2020, the loan agreement was varied so that a further sum of $2,850,000.00 was advanced, the full $27,000,000.00 having been advanced. The loan was subject to an interest rate of 8%.
In November 2017, Mr Sommariva, in his capacity as the builder of the two towers, entered into a contract with a firm Core-Form to supply and construct formwork at the site. In August of the following year, a dispute arose between Core-Form and Mr Sommariva regarding the quality of work done at the site. As a consequence, Mr Sommariva declined to pay for the works done and thereafter Core-Form laid off its workers.
These eventualities led to the relevant union, the Construction, Forest, Maritime, Mining and Energy Union (the CFMMEU) becoming involved on behalf the laid off workers and, as a result, the 250 East Terrace site was subject to picket.
It is the effect of Mr Sommariva’s evidence that this industrial action, which was subsequently found to be illegal in nature, significantly delayed the project and resulted in a blow out in construction costs. He estimates that additional costs of around $2,000,000.00 were incurred. In addition, the completion date for the project was also significantly delayed.
In addition, although Mr O’Neill himself has not personally deposed to this circumstance, it appears uncontroversial that he suffered a heart attack, which required him to undergo by-pass surgery, following a period of compromised health. This occurred in May of 2018. He also suffers from diabetes.
It is Mr Sommariva’s position that these health issues impacted on Mr O’Neill’s ability to commit his time and energy to the development. It being envisaged that he (Mr O’Neill) would be involved in the sale of the individual apartments, which would be capitalised and repaid to RMBL to reduce the monies owed by the joint venturers to it and defray as much interest as possible.
It is further Mr Sommariva’s evidence that Mr O’Neill began to suffer financial problems from 2017 onwards. Again, Mr O’Neill himself has not provided any evidence in respect of this contention. However, in his Bankruptcy Form statement of affairs, Mr O’Neill indicated the causes of his insolvency to be ill health leading to business failure. As will be detailed in greater detail, in due course, there can be no doubt that Mr O’Neill has suffered significant personal vicissitudes over the last few years.
What is clear is that on 24 August 2017, Mr O’Neill and his wife, Denise O’Neill, entered into a credit loan contract with an entity known as Lerret Holdings Pty Ltd, of which John Oszczypok is the sole director. The principal borrowed was $226,110.00, which was to be repaid, in full, on 25 August 2018. I have not been provided with a copy of the relevant loan contract. What is clear is that it attracted a significant level of penalty interest, if monthly instalments were not paid.
In the proceedings before me, counsel for Pajo Projects (essentially Mr Sommariva) characterised Lerret Holdings as a lender of last resort. This seems to me to be an apposite descriptor. Apart from one monthly payment of $5,000.00, Mr and Mrs O’Neill were unable to pay any of the required instalments.
As a consequence, by August of 2018, the debt in question had reached an amount of approximately $1,600,000.00. In his evidence, Mr Sommariva deposes that he believes the standing interest rate on the debt to have been 24% but the default interest rate to be 60% compounding. However it is calculated, it is clear that in around 12 months, the debt increased seven fold.
Concurrently with the loan agreement with Mr and Mrs O’Neill, Lerret registered a mortgage over land owned by the O’Neill’s at Torrens Park to secure the advance. This property was also apparently subject to a prior mortgage in favour of the Police Credit Union.
As best I can determine, the Torrens Park land was sold to another developer for the sum of approximately $1,310,000.00 in January of 2020, which recouped approximately $344,000.00, which was seized by Lerret. In these circumstances, at some time in 2020, Lerret Holdings commenced proceedings to recover the monies owed to it by Mr and Mrs O’Neill in the Supreme Court of South Australia. Mr and Mrs O’Neill elected to defend the proceedings on a variety of bases.
Firstly, and principally, they asserted that the relevant loan agreement was unconscionable in nature, given the onerous interest provisions which became engaged if the stipulated monthly instalments were not paid on time. Secondly, Mr O’Neill asserted that he had no recollection of entering the agreement and would not have agreed to such a loan, at the interest rate so stipulated. For her part, Mrs O’Neill deposed that she did not understand what she was signing and received no explanation from her then-legal advisor.
In answer, Lerret Holdings asserted that the agreement in question could not be characterised as being unconscionable in nature. Rather, it asserted that the interest payments concerned represented an appropriate penalty directed to ensure prompt payment. In addition, given that both Mr and Mrs O’Neill were experienced in commercial matters, it urged the court to reject their assertions that they did not understand the implications of what they were doing with Lerret.
Given its position, Lerret Holdings applied for the grant of summary judgment in its favour, which the O’Neill’s opposed. These competing application came before Judge Bochner on 21 September 2020, with Judgment delivered on 3 February 2021. The application for summary judgment was successful with her Honour entered judgment in the favour of Lerret Holdings in an amount of $1,675,779.56.
Her Honour reached the conclusion that the O’Neill’s had no reasonable prospect of persuading the court, on final hearing, that it would find the loan agreement in question was unconscionable in nature or offended any applicable provisions of the Australian Securities & Investments Commission Act 2001 (Cth). In essence, her Honour found that, on final hearing, the court would not find that Lerret’s conduct was so far out the societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscious.[7]
[7] See Lerret Holdings Pty Ltd v O’Neill & Ors (Supreme Court of South Australia, Judge Bochner, 3 February 2021), SCCIV-20-436.
This decision has not been subject to appeal. As a consequence, on 6 May 2021 the official receiver issued a bankruptcy notice to Mr and Mrs O’Neill in an amount of $1,331,292.06 being the Supreme Court judgment debt less monies paid to it since the judgment in an amount of $344,487.50, which I assume is the amount referable to the sale of the Torrens Park land. However, in the absence of definitive evidence from Mr O’Neill, I cannot be certain that this is the case.
What is striking is that, ostensibly at least, Lerret was able to recoup all of the principle advanced by it to the O’Neill’s, together with an additional sum of approximately $118,000.00 through its execution against the Torrens Park land. The remainder of the judgment debt relating to penalty interest.
Mr and Mrs O’Neill did not satisfy the bankruptcy notice, in the period stipulated for payment. In these circumstances, on 20 July 2021 solicitors for Lerret Holdings issued a creditor’s petition against Mr and Mrs O’Neill in this court. In support of the petition, Mr Oszczypok deposed an affidavit, on 11 October 2021, in which he indicated that the relevant debt remained outstanding to Lerret.
Ultimately, on 19 October 2021, Registrar Colbran ordered that the estates of Mr and Mrs O’Neill be sequestrated pursuant to the provisions of the Act. The relevant date of bankruptcy was specified as being 6 July 2021. Initially, Allan Scott and Thomas Otway were appointed as joint Trustees of their estate. John Gervase Shanahan, the applicant in the current proceedings, was subsequently appointed as substitute Trustee on 29 April 2022. Mr Shanahan commenced the current proceedings on 13 October 2022. He seeks the following orders, on a final basis:
1. Orders under s139D of the Bankruptcy Act 1966 that:
1.1The estate held by the First Respondent, and/or the Second Respondent, as trustee of the East Terrace Trust and the Fourth Respondent in the land described in Certificate of Title Register Book Volume xxx Folio xx, being Apartment xxx, xx xx Terrace xxxx vest in the Applicant.
1.2The First Respondent execute a memorandum of transfer to effect the orders sought in paragraph 1.1 and deliver it up to the Applicant forthwith.
2.The First Respondent and the Second Respondent and the Fourth Respondent be permanently restrained from any dealings with the land described in Certificate of Title Register Book Volume xxx Folio xx, being Apartment xxx, xx xx Terrace xxxx.
3.The Third Respondent be restrained from exercising his power of appointment to remove the trustee or appoint a new trustee to the East Terrace Trust until the Applicant has been registered as the proprietor of the land described in Certificate of Title Register Book Volume xx Folio xx, being Apartment xxx, xx xx Terrace xxxx
4. Costs.
As previously indicated, the court must make some assessment as to whether Mr Shanahan has reasonable prospects of securing these orders, on a final basis, in determining whether to grant him the interim relief sought, which is as follows:
1.The First Respondent and the Second Respondent and the Fourth Respondent be restrained from any dealings with the land described in Certificate of Title Register Book Volume xx Folio xx, being Apartment xxx, xx xx Terrace xxxx until further order.
2.The Third Respondent be restrained until further order from exercising his power of appointment to remove the trustee or appoint a new trustee to the East Terrace Trust.
3.Costs.
The solicitors for Mr Shanahan, incidentally the same firm as had previously represented Lerret Holdings Pty Ltd, sought that the application be listed urgently for hearing on an ex parte basis. The basis of the urgency can be summarised in the following terms:
·Apartment xx was registered in the names of the relevant joint venturers, namely 250 East Pty Ltd & Pajo Projects Pty Ltd;
·The joint venturers had agreed, on the completion of the 250 East Terrace Development, Apartment xx would be transferred to the East Terrace Trust;
·The project had attained practical completion in February 2021;
·On 19 January 2022, after his bankruptcy, Mr O’Neill, in his role as the sole director and shareholder of 250 East Pty Ltd, had caused that company to be removed as a Trustee of the East Terrace Trust and in lieu thereof he had appointed 250 East Property and Building Pty Ltd as its Trustee, which company is controlled by Mr Sommariva;
·Prior to his bankruptcy, Mr O’Neill had provided significant personal services, to the joint venturers, for which he had received no apparent or significant remuneration.
In support of his application, Mr Shanahan relied on two affidavits, as follows:
·An affidavit of himself filed on 6 October 2022;
·An affidavit of Tylor Newlyn filed, an Inquiry Agent, filed on 6 October 2022.
The effect of the Mr Newlyn’s evidence was that he had been surveilling Mr O’Neill, at 250 East Terrace, in May of 2022 and had observed him to drive; attend a café and shopping centre; and to be in his (Mr Newlyn’s) estimation hale and hearty.
As requested, the application was listed urgently, before me, on 17 October 2022, on an ex parte basis. In this context, following submissions made by Mr Dal Cin, counsel for Mr Shanahan, I was prepared to make the interim orders sought pending Mr O’Neill being served, along with the other entities named in the application, relating to Mr Sommariva, being served. I provided some written reasons in support of this decision.
The thrust of Mr Dal Cin’s submissions, at this stage, was that his client, Mr Shanahan had made exhaustive enquiries regarding Mr O’Neill’s business affairs, including to Mr O’Neill himself. This had resulted in Mr Shanahan obtaining an extensive dossier of documents relating to the 250 East Terrace development. As a result of those enquiries, Mr Shanahan had become concerned that there was a reasonable probability that Mr O’Neill and Mr Sommariva had liaised with one another in an attempt to frustrate his (Mr Shanahan’s) administration of the estate.
He had reached this conclusion on the following grounds, which largely related to answers provided to him, by Mr O’Neill, in his statement of affairs dated 16 June 2022:
·Mr O’Neill provided his residential address as Apartment xx;
·He indicated that his present accommodation was being provided by a business partner and no rent was required to be paid;
·He nominated Mr Sommariva of Apartment xx, as personal contact for him and described Mr Sommariva as being a friend;
·Mr O’Neill denied having any interest in real estate; and
·In answer to the question regarding his involvement with any trust as a trustee, beneficiary or unit holder, in the past five years, Mr O’Neill indicated the negative, which Mr Shanahan assesses to be an answer lacking in candour, given Mr O’Neill obvious involvement with a significant number of trusts and his apparent commercial acumen.
It was on the basis of these factors that Mr Shanahan sought the various interim injunctions in question. The effect of these injunctions being to prevent either 250 East Property & Building Pty Ltd or Pajo Projects Pty Ltd from dealing with Apartment xx and to prevent Mr O’Neill appointing another Trustee to the East Terrace Trust.
During the hearing of 17 October 2022, Mr Dal Cin referenced some calculations, which he attributed to Mr O’Neill, in which Mr O’Neill calculates the value of the fourteen apartments at 250 East Terrace to be approximately $46m; the cost of the land to be $4m; the building costs to be $18m; GST to be $400,000.00; the strata fees to be $100,000.00; and allowing him a consultancy fee of $360,000.00.[8] Again, Mr O’Neill has not confirmed or denied the accuracy of these figures or indeed whether the calculations in question are his.
[8] See annexure JGS-1 to affidavit of John Gervase Shanahan filed 13 October 2022 at page 211.
In all these circumstances, Mr Shanahan has deposed as follows:
I apply for interlocutory injunctions to restrain dealings with Apartment xx, and to restrain the exercise of the power of appointment by the bankrupt in respect of the East Terrace Trust because I am concerned that if the bankrupt, the First Respondent, or the Fourth Respondent are not restrained, then they may enter into a transaction which will divest the First Respondent, and the East Terrace Trust, of Apartment xx and make it more difficult for these proceedings to successfully recover the land.
I am also concerned that the bankrupt may exercise the power of appointment so as to change the trustee of the East Terrace Trust again and thereby frustrate these proceedings.
In my capacity as trustee in bankruptcy of the bankrupt, I give an undertaking as to damages.
There are presently no assets in the administration of the bankrupt estate.
I have the benefit of an indemnity from a creditor of the bankrupt in respect of any liability which may arise by reason of the undertaking as to damages.[9]
[9] Affidavit of John Gervase Shanahan filed 13 October 2022 at [46]-[50].
Those advising Mr Sommariva believe that the only creditor likely to provide such an indemnity is Lerret Holdings through the agency of Mr Oszczypok. In this context, Mr Sommariva’s solicitors have inquired of Mr Shanahan’s solicitor of the nature of this indemnity and as to what is the extent, if any, of other debts said to be subject to the bankruptcy of Mr O’Neill. I have been told by Mr McCarthy, counsel for the Sommariva entities, that no satisfactory response has been received to this enquiry.
In all these circumstances, I was prepared to make the interim ex parte injunctions sought by Mr Shanahan but required the urgent service of the application on each of the respondents concerned, prior to a further hearing which was scheduled for 28 October 2022. This led to Mr Sommariva filing two affidavit in opposition to the continuation of the injunction, as follows:
·An affidavit of Joseph Anthony Sommariva filed on 27 October 2022; and
·An affidavit of Robert Nicholas Cunninghame Warden filed 27 October 2022.
The effect of Mr Warden’s evidence is to refute that of Mr Newlyn regarding his alleged observations of Mr O’Neill in the vicinity of 250 East Terrace. He identified himself as being the person said to be Mr O’Neill driving in and out of its carpark and drinking coffee at a nearby café by Mr Newlyn.
What was apparent was that Mr O’Neill had not been personally served with either Mr Shanahan’s application or the orders of 17 October 2022 notwithstanding the fact that it appeared relatively uncontroversial that Mr O’Neill continued to live at Apartment xx. In this context, the matter was further adjourned until 24 November 2022 to enable service on Mr O’Neill to be effected.
Mr O’Neill has still not been personally served. As a consequence, on 18 November 2022, an application was made for substituted service, which was supported by a further affidavit of Mr Newlyn. In this affidavit, Mr Newlyn deposed that he had attended at 250 East Terrace on 29 October and activated the intercom for Apartment xx, which had led him to have an electronically conveyed conversation with a person who identified herself as being Mrs O’Neill.
She had informed Mr Newlyn that Mr O’Neill was being attended by a nurse and could not come downstairs to engage with him. Mr Newlyn arranged to return within an hour on which occasion Mrs O’Neill told him her husband was too ill to come downstairs. Mr Newlyn suggested that he would come up to the seventh floor to provide the relevant documents to Mr O’Neill personally, a request which she rebuffed and in lieu thereof, she suggested that the documents could be left in the mailbox of Apartment xx.
Mr Newlyn did not accept this proposal. Rather, he re-attended at the intercom on four further occasions on 2 and 3 November 2022 but received no response. In these circumstances, an application is made that, in lieu of personal service, the relevant documents be served by two mechanisms as follows:
·By being left in the mailbox of Apartment xx;
·By delivering them to Mr Sommariva on the basis that he was nominated by Mr O’Neill as his emergency contact in his statement of affairs provided to the Trustee.
The Court’s authority to make an order for substituted service arises under Division 6.4 of the Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (“the Rules”). In particular, rule 6.14(1) directs that:
If, for any reason, it is impracticable to serve a document in a way required under this Part, the Court may make an order dispensing with service or substituting another way of serving the document.
In making such an order, the court is directed to take account of a number of matters which are set out in rule 6.15 of the Rules and reads as follows:
·whether reasonable steps have been taken to attempt to serve the document; and
·whether it is likely that the steps have been taken have brought the existence and nature of the document to the attention of the person to be served; and
·whether the person to be served could become aware of the existence and nature of the document by means of advertising or other means of communication that is reasonably available; and
·the likely cost to the party of serving the document, the means of that party and the nature of the proceedings; and
·any other relevant matter.
I am satisfied that reasonable attempts have been made to bring the proceedings to the attention of Mr O’Neill and alert him to the application instituted by Mr Shanahan. Mr Newlyn has attended at the premises which incontestably constitute Mr O’Neill’s present place of residence on numerous occasions. He has spoken to Mr O’Neill’s wife about the purpose of his attendance there.
Mr McCarthy, on behalf of Mr Sommariva objects to his client being the conduit through whom Mr O’Neill is to be provided with the relevant documents. As will become apparent, when his evidence is considered, it is his position that he and Mr O’Neill currently have no communication with one another and, for all practical purposes, any previous commercial relationship between the two is now defunct. For this reason, he opposes the second limb of the application for substituted service but has no position in respect of the first.
For those reasons, I propose to make an order that in lieu of personal services of the various documents concerned, the Trustee has leave to place them in the letter box of Apartment xx in an envelope addressed to Mr O’Neill. A more difficult issue concerns the extent to which the court should proceed in the absence of Mr O’Neill, given concerns he may be gravely unwell and the current application has obvious implications for his residential security.
Mr Sommariva’s Evidence
In his capacity as a director of 250 East Property & Building Pty Ltd and Pajo Projects Pty Ltd, Mr Sommariva has filed two affidavits in these proceedings as follows:
·An affidavit of himself filed on 27 October 2022;
·A further affidavit of himself filed on 23 November 2022.
Mr Sommariva has confirmed that his area of professional expertise is as a commercial builder, who holds an unrestricted building licence. He has operated Pajo Projects since 2012. He acknowledges being involved with Mr O’Neill in past development projects – Mr O’Neill securing and marketing them; he in the actual construction.
It is the effect of his evidence that he personally had a separate contract as the builder of the 250 East Terrace development with the joint venturers. This contract was entered into on 17 May 2017. It stipulated a completion date of December 2019. As previously indicated, it is his position that the project was significantly delayed, more seriously by the picket illegally organised by the CFMMEU. He asserts that the delay cost the development approximately $2m. In addition, additional interest accrued in respect of the loan provided by RMBL.
It is Mr Sommariva’s position that the joint venturers, one of which is Pajo Projects Pty Ltd, are indebted to him personally as the builder of 250 East Terrace, a sum of $3.5m. In this context, he deposes that he has commenced proceedings in the District Court of South Australia, in his own capacity, against 250 East Pty Ltd and Pajo Projects Pty Ltd,[10] on 21 October 2021. Mr McCarthy appeared for Mr Sommariva as applicant; whilst Mr Sommariva appeared, in person, for each of the joint venturers.
[10] Mr Shanahan filed an affidavit on 21 November 2022 to which is attached the relevant record of proceedings in that court and the applicable Notice of Lien and Caveat.
The cause of action was a lien of $2.6m said to be due to Mr Sommariva in respect of work done at land identified in a number of certificates of title, including that applicable to Apartment xx, which was lodged on 12 October 2021. It resulted in a caveat entered on 20 October 2021. Ultimately a consent judgment was entered in favour of Mr Sommariva, on 25 July 2022 in an amount of $3.5m. I have not been provided with a copy of the actual order made.
As a consequence of the judgment debt a charging order was entered in respect of the title of Apartment xx only, which restrains 250 East Pty Ltd and Pajo Projects Pty Ltd (as I understand the registered proprietors of the land) from dealing with it until the charge is paid.
Mr Shanahan does not dispute that Mr Sommariva is likely to be owed some amount for his cost but is suspicious that the amount in question escalated between the date of filing of the lien and the filing of the charge and on account of the fact that only Apartment xx has been charged.
In addition, Mr Dal Cin submits that it is likely that Mr Sommariva received regularly progress payments, for the work done by him, from the loan facility provided by RMBL Investments Limited. In this context, I have not been provided with any invoices rendered by Mr Sommariva to the joint venturers or any reconciliation of the amount of these invoices with monies advanced by the lender.
However, the thrust of Mr Dal Cin’s submission is that it can be no coincidence that only Apartment xx is charged with the judgment debt and the process which led to it were commenced around the time of Mr O’Neill’s bankruptcy. In these circumstances, he contends that there is a real risk that the charge created in favour of Mr Sommariva personally is a mechanism to frustrate Mr Shanahan’s administration of Mr O’Neill’s estate, particularly in terms of recouping what he (Mr O’Neill) may be entitled to in respect of his interest in Apartment xx or in regards to consultancy fees due to him in respect of the development generally.
The main thrust of Mr Sommariva’s evidence is that from at least 2018 onwards, Mr O’Neill’s ill health led to him being less and less able to contribute to the management of the development, which fell increasingly onto his shoulders alone. However, both joint venturers had to sign off on expenditure relating to it. In these circumstances, Mr O’Neill appointed his son to be a director of 250 East Pty Ltd, so that the development could continue. It is also the effect of Mr Sommariva’s evidence that he injected his own funds into the development to keep it going. He denies that any of the funds, advanced by Lerret to Mr and Mrs O’Neill were utilised in the development.
Tragically, Mr O’Neill’s son died unexpectedly in late 2021. Mr O’Neill himself was in no position to resume his control of the company, even if his bankruptcy had permitted it. It is these circumstances, which led to Mr O’Neill appointing 250 East Property & Building Pty Ltd as the trustee of the East Terrace Trust.
In these circumstances, Mr Sommariva denies that there was any financial impropriety arising from the appointment, which occurred solely as a mechanism to enable the development to be finished and so that the completed apartments could be sold and the joint venturers’ financial obligations, including to RMBL could be acquitted. Essentially, he asserts that there was no-one other than he who could step in to fill the breach caused by the illness and bankruptcy of Mr O’Neill and then the death of his son.
As previously indicated, RMBL has assumed control of both 250 East Pty Ltd and Pajo Projects Pty Ltd and as a consequence Mr Sommariva asserts that it has taken all the proceeds of the apartments sold in the development to date. In addition, it is Mr Sommariva’s evidence that the absence of Mr O’Neill has compelled him personally to engage in litigation with a purchaser of an apartment, Mr McLachlan, who was aggrieved at the late settlement of his purchase.
One of the difficulties confronting the court, at this stage, and indeed Mr Shanahan, is that there has been no final reconciliation between the joint venturers and the various entities with whom they have contracted – RMBL; Mr Sommariva, in his capacity as the builder; and other individuals not as yet clearly specified, including Mr O’Neill, in his personal capacity as a consultant to the development; – regarding what they may or may not be due on the completion of the development. The relevant title of Apartment xx indicates that beside the mortgage in favour of RMBL and the charge created by the judgment debt in favour of Mr Sommariva, there are caveats lodged against relating to other potential interests.
It is in this context that the probity of maintaining the existing injunction must be considered. In my view, to a very large extent the court is operating in a vacuum. Mr Shanahan has been able to obtain some records but they are neither contemporary nor complete.
Mr McCarthy concedes that Mr O’Neill may be due some sum of money arising from services rendered by him, over the course of the development, to the joint venturers. However, there has been no indication what this sum may be apart from Mr O’Neill personal jottings in respect of it ($360,000.00), which he has not been in a position to either confirm or deny due to his lack of formal involvement in these proceedings. In his affidavit, Mr Sommariva asserts that there is no such agreement.
The most recent record, provided to the court, by Mr Shanahan, indicates that as at October 2019, $17.945m was outstanding to RMBL.[11] He has also provided an email from Mr Sommariva to the ATO, dated 3 December 2020 which appears to indicate the sale of eight apartments for a total of $25.05m. The email makes reference to apartments xx & xx, allocating a value of $4.1m and $3.6m to each of them respectively but they are each described as being joint venture shareholder property which may or may not have GST implications. Three other properties, at a total value of $9.8m, are indicated to be not sold.[12]
[11] See affidavit of John Gervase Shanahan filed 6 October 2022 at page 269.
[12] See affidavit of John Gervase Shanahan filed 6 October 2022 at page 275.
In his first affidavit, Mr Sommariva asserts that though the development has reached a stage of practical completion, there are still works which need to be completed. He also deposes that the terms of the joint venture prevent the transfer of the relevant penthouse apartments to either of the joint venturers concerned until all liabilities arising from the development have been paid. This accords with my understanding of the joint venture.
In addition, as previously indicated the effect of the charge granted in Mr Sommariva’s favour is that 250 East Pty Ltd nor Pajo Projects can deal with Apartment xx until the amount of the judgment debt is satisfied. Essentially, Mr Sommariva (and Mr O’Neill) are restrained from dealing with the apartment until the debt is settled. He has deposed that he will not consent to any dealings with the property until he is paid. He further deposes that prior to these proceedings, whilst he has controlled the East Terrace Trust, through his directorship of 250 East Property & Building Pty Ltd, he has not authorised any distributions of the trust.
In this context, he deposes as follows:
As the director of the first respondent, I only intend to pay what is due to me as builder, the RMBL debt and other secured debt. I will pay any surplus into the Court’s suitor’s fund to abide the event of this action. I give an undertaking to this Court to that effect.
I will not exercise the discretion to distribute any eventual profits accruing to the East Terrace Trust on completion of the Joint Venture, except on direction of the Court. I give an undertaking to this Court to that effect.[13]
[13] See affidavit of Mr Sommariva filed 27 October 2022 at [75.6] & [75.14]
He further undertakes not to distribute any profits arising from the joint venture, either to Pajo Projects Pty Ltd or to the East Terrace Trust, which he currently controls, unless directed to do so by the court. Again he will provide an undertaking to this effect.
In his more recent affidavit, Mr Sommariva deposes that the sale of Apartment 401 settled on 21 November 2022 and Apartment 102 will settle on 15 December 2022. He does not indicate if there are other apartments awaiting settlement. By necessary implication, the two penthouse apartments, potentially available to each of the joint venturers if a profit has accrued, remain unsold.
In this context, Mr Sommariva has deposed as follows:
If settlement of Apartment 102 occurs on 15 December 2022 as anticipated, there will still be a debt of more than $1m plus accrued and ongoing interest and costs owing to the Financier.
I anticipate that the financier's debt may not be able to be paid out without selling Apartment xx.
If it is necessary for the Fourth Respondent and the Financer (as the appointed controller) to sell Apartment xx in order to finalise repayment of outstanding debts for the Development, paragraph 1 of the Orders will prevent this from occurring if it remains in place.
For this reason, I am seeking the Court vary the orders made, such that the First and Fourth Respondent may do whatever becomes necessary in order to sell and transfer ownership in Unit xx in order to satisfy the debts of the Development and that any proceeds after payment of each of the Financier and other secured creditors then be paid into this Court.
In that regard, I refer to and renew my undertakings at paragraphs 75.6 and 75.14 of the First Sommariva Affidavit.[14]
[14] See affidavit of Joseph Anthony Sommariva filed 23 November 2022 at [6] – [10].
As I understand the thrust of Mr McCarthy’s submissions, it will be necessary for Apartment xx to be sold to acquit the debt to RMBL. Whether there are other apartments awaiting sale, apart from the two penthouses, is unclear to me. In addition, if Mr Sommariva takes the monies charged against xx, on any basic calculation, it would appear that there is a grave risk that there will be no or very funds left to be distributed to the joint venturers.
Mr Dal Cin concedes that RMBL’s interest in Apartment xx is secured and, as such, has priority over any claim arising from Mr O’Neill’s bankruptcy. It also seems to be agreed that it is potentially counterproductive, to all concerned, that the debt to RMBL be allowed to compound whilst these proceedings are resolved as whatever surplus is available (which necessarily is far from clear) will be eroded to the detriment of both joint venturers.
However, as previously indicated, the thrust of the Trustee’s concerns relates to his apprehension that any sale and subsequent settlement of Apartment xx, if its proceeds are then directed towards discharging the charge in Mr Sommariva’s favour, relating to the costs arising from the build of 250 East Terrace, is likely to defeat any claim he has on behalf of potential creditors of Mr O’Neill arising from the potential application of section 139D of the Act.
The difficulty with this contention is that, pursuant to the applicable joint venture agreement, the costs accruing from the building are to be paid prior to any distribution of profits arising to the joint venturers themselves. Essentially, the joint venturers agreed to prioritise the building and ancillary costs arising over any distribution to them.
In answer to this criticism, Mr Dal Cin relies on two major arguments, which primarily relate to the absence of any comprehensive accounting or reconciliation of the profits and losses of the development. Firstly, he is critical that his client has not been provided with any actual invoices in respect of the cost of the work undertaken by Mr Sommariva; secondly, there has been no accounting of what amounts have been paid to him, by way of progress payments, from the monies advanced by RMBL.
In these circumstances, he contends that the court needs to take a cautious and conservative approach in regards to the current ex parte injunction. It is suggested that if all of the proceeds of the sale of Apartment xx are directed first to RMBL and then Mr Sommariva, this will leave only Apartment xx unsold, which will remain in Mr Sommariva’s sole control, which will be gravely unfair to the creditors of Mr O’Neill.
In response, Mr McCarthy submits that Mr Sommariva has priority over unsecured creditors. In these circumstances, he questions the adequacy of the undertaking as to damages provided by Mr Shanahan. In his contention, if the injunction, in its present form is extended, interest on the sums outstanding to RMBL in particularly will continue to compound in circumstances in which it is axiomatic that it must recoup what is owed from the sale of Apartment xx and any other apartments, in the development, as yet unsold or awaiting settlement.
In these circumstances, he questions what he would characterise as the lack of transparency of Mr Shanahan regarding the identity of the entity prepared to provide the relevant guarantee. If the only creditor is Lerret, the individual concerned must be Mr Oszczypok. As previously indicated, it is Mr Sommariva’s evidence that none of the monies advanced by Lerret to Mr & Mrs O’Neill were utilised in the development.
As a consequence, he asserts that the potential prejudice to his clients, of not allowing their debts to RMBL and their builder, to be settled, is far greater than any prejudice to the creditor(s) represented by Mr Shanahan, who have not been fully disclosed. In addition, he points to the undertakings proffered by Mr Sommariva that there will be no distributions of profits from the development, if there are any, made to the relevant trust, which he acknowledges that he control. In this context, he points to the fact, which Mr Dal Cin cannot refute, that there has been no such distributions up to this stage.
In all these circumstances, he contends there is no prospect of an order being made that Apartment xx vest in the Trustee, at the final hearing stage and therefore the injunction sought should not be granted.
Legal principles Applicable
Section 30(1)(b) of the Bankruptcy Act empowers the court to make any orders, including such injunctions as are necessary for the purposes of carrying out or giving effect to its administration of the Act.
In addition, section 140 of the Federal Circuit and Family Court of Australia Act 2021 (Cth) empowers Division 2 of the court to make whatever orders, including interlocutory orders, as it thinks appropriate. Accordingly, I am satisfied that I have authority to make the orders sought by the Trustee.
Ryan J of the Federal Court discussed the application of section 30 in the context of section 139A of the Act in Pattison (Trustee of the Bankrupt Estate of Karas) v Commoore Pty Ltd & Ors.[15]It is useful briefly to set out the factual circumstances of the case, which led to Ryan J declining to grant the injunction sought. The first respondent was the Trustee of a family trust, of which the bankrupt and his wife were beneficiaries. It purchased a property. Later the trust was determined and its assets distributed to Mrs Karas, who thus became registered proprietor of the property. She borrowed money secured against it. Mr Karas was involved in obtaining planning permission to develop the property. It was subsequently sold in an arm’s length transaction.
[15] Pattison (Trustee of the Bankrupt Estate of Karas) v Commoore Pty Ltd & Ors [1998] FCA 350.
The Trustee of the bankrupt estate did not seek to prevent settlement of the sale. However, he did seek that the proceeds of sale be frozen until the hearing of his application brought pursuant to the provisions of section 139D – that is the mortgagee would not be paid in respect of the monies advanced by it to Mrs Karas. It was argued that if the monies secured against the property were discharged at settlement, creditors of Mr Karas would be defeated by the claims of the financier concerned.
Ryan J said as follows:
I accept that an injunction may be granted under section 30 of the Bankruptcy Act on limited material to preserve the position so that a trustee’s investigations can be completed in order to ascertain whether certain disputed property forms part of a bankrupt’s estate. Thus in Re Bayles; Ex parte Official Trustee in Bankruptcy[16] Pincus J observed at 457:
It appears to me to follow, inter alia, that it is not necessary in every such case as this to show that there is a serious question to be tried; it may be that at an early stage so little information is available with respect to the matter in relation to which an injunction is sought that the “serious question” test cannot be passed. Where one has an unco-operative bankrupt who has arranged his affairs in a complex way, the trustee may have difficulty in showing, shortly after bankruptcy, where and how the bankrupt’s money has gone; interlocutory orders to hold the position may nevertheless be very necessary.
However, that was a case where an order was made freezing the proceeds of sale of a property, a half interest in which had formerly been held by the bankrupt and had been transferred to a company controlled by his children. The trustee contended that the transfer was void under section 120 or section 121 of the Act. What his Honour did there was far removed from interfering with the interest in a property of a third party acquired at arm’s length and for full consideration. In a case such as the present I consider it is incumbent on the trustee to demonstrate a serious question to be tried on the principles enunciated, for example, in Australian Coarse Grains Pool Pty Ltd v The Barley Marketing Board of Queensland[17]as to whether that third party can have recourse to proceeds of sale in priority to an actual or inchoate interest in the property of a trustee in bankruptcy. In my view no such serious question has been made out in the present case.
[16] Re Bayles; Ex parte Official Trustee in Bankruptcy (1987) 73 ALR 455.
[17] Australian Coarse Grains Pool Pty Ltd v The Barley Marketing Board of Queensland (1982) 57 ALJR 425.
Accordingly, it seems to me, Ryan J alluded to a dilemma facing the court at an interim stage regarding the granting of injunctions in bankruptcy proceedings. In some cases, particularly those in which the bankrupt is uncooperative and their financial affairs convoluted, it may be impossible for a Trustee to demonstrate that there is a serious issue to be tried in the sense that they have an unimpeachable claim on the property in contention.
In this context, an injunction may be appropriate. This would appear to be Mr Dal Cin’s position. In contrast, Mr McCarthy asserts that the Trustee cannot establish a serious issue to be tried on the basis that any creditor of Mr O’Neill cannot have priority over RMBL or Mr Sommariva himself.
The issue regarding the strength of the case required to be established to support an interim injunction was resolved by the High Court in Australian Broadcasting Corporation v O’Neill[18] on the following basis:
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.
[18] Australian Broadcasting Commission v O’Neill (2006) 229 ALR 457 at 478 [65] per Gummow and Hayne JJ.
Accordingly, it is necessary for Mr Shanahan to demonstrate a sufficient likelihood that he will achieve an order in his favour pursuant to section 139D, to justify the preservation of the status quo vis-à-vis Apartment xx. How strong that probability needs to be depends on the nature of the rights which he asserts and the practical consequences likely to flow from the injunction, if granted.
Section 139A authorises a bankruptcy trustee to apply to the court in respect of what is known as a respondent entity. The expression related entity is defined in section 5 as including a trust, a trustee or a beneficiary of a trust.
Section 139CA defines a concept known as the examinable period, which allows applications to be made in respect of a related entity in the period five years prior to the making of any applicable sequestration order.
This in turn engages section 139D, which is headed Order relating to property of an entity other than a natural person. The section reads as follows:
(1)Where, on an application under section 139A for an order in relation to a respondent entity other than a natural person, the Court is satisfied that:
(a)the bankrupt supplied personal services to, or for or on behalf of, the respondent entity at a time or times, during the examinable period and before the end of the bankruptcy, when the bankrupt controlled the entity in relation to the supply of those services;
(b) either:
(i)the bankrupt received for those services no remuneration in money or other property; or
(ii)the remuneration in money or other property that the bankrupt received for those services was substantially less in amount or value than a person supplying those services in similar circumstances might reasonably be expected to have received if the person had dealt with the entity at arm's length in relation to the supply of those services;
(c)during the examinable period, the entity acquired an estate in particular property as a direct or indirect result of, or of matters including, the supply by the bankrupt of those services;
(d)the bankrupt used, or derived (whether directly or indirectly) a benefit from, the property at a time or times during the examinable period when the bankrupt controlled the entity in relation to the property; and
(e) the entity still has an estate in the property;
subsections (2) and (3) have effect, whether or not the bankrupt has ever had an estate in the property.
(2) The Court may, by order, vest in the applicant:
(a)the entity's estate in the whole, or in a specified part, of the property; or
(b)a specified estate in the whole, or in a specified part, of the property, being an estate that could, by virtue of the entity's estate in the property, be so vested by or on behalf of the entity.
(3) The Court may make an order directing:
(a) the execution of an instrument;
(b) the production of documents of title; or
(c) the doing of any other act or thing;
in order to give effect to an order under this section made on the application.
Conclusions
The interlocutory issue arising in this case, namely whether the ex parte injunction made on 17 October 2022 should continue or not and, if so, on what terms and conditions, arises in the context of an evidentiary controversy which is impossible for the court to determine at this interim stage. The controversy is easily stated – what is the extent, if any, of the profits which will be available to the original joint venturers, for distribution between them, once all the costs of the development of 250 East Terrace have been acquitted.
In this context, another subsidiary controversy arises. It is an agreed fact that the monies owed to RMBL and secured by mortgage of each of the remaining unsold apartments must be paid in priority to other debts arising from the development. Thereafter, construction costs have priority over joint venturer profits.
The controversy being what, if any, is the overlap between monies advanced by RMBL and monies advanced to Mr Sommariva, as the builder of the developer. The resolution of this issue and the necessary final reconciliation of all creditors of the project will determine what profit are available for distribution between the joint venturers and what form such distribution will take. This in turn, must have implications for the strength or otherwise of Mr Shanahan’s claim on Mr O’Neill’s entitlement to a portion of such profits, even in his own personal capacity or through a related entity pursuant to the provisions of section 139D.
Mr McCarthy concedes that Mr O’Neill may be due some form of remuneration for the services which he provided the joint venturers in respect of the development of 250 East Terrace. Given the complexity of the project and its duration, notwithstanding Mr Sommariva’s assertion that he (Mr O’Neill) became less and less involved as his health deteriorated, this appears to me to be probable. The obvious difficulty arising in this context being the lack of evidence from Mr O’Neill himself.
In addition, the joint venture agreement envisages entities previously controlled by Mr O’Neill receiving 60% of the profits arising from the project, including the possibility that Apartment xx would be transferred to the joint venturer which he controlled, if sufficient funds remained after payment of all costs arising from the project had been acquitted, including the monies due to RMBL.
In my view, it is striking that Mr O’Neill occupies the relevant apartment. This outcome is consistent with both an assertion that it is a consequence of the grace and favour of Mr Sommariva and one that his occupation of the apartment relates to the fact that it has some form of inchoate claim on it or at least some of the profits arising from the development. In addition, at this juncture, it is far from clear what capital, if any, Mr O’Neill has provided to the project. It being the case that he was involved with the acquisition of the relevant land in the first place.
Accordingly, in my view, there is a possibility that Mr Shanahan may be able to engage the mechanisms available to him pursuant to the provisions of section 139(1)(b) of the Act. The services provided by Mr Shanahan, to the development, arose during the examinable period as defined by section 139CA.
Certainly, in my view, it is the case that it will be necessary for the issue to go to trial. In my view, what benefits and or other remuneration to which Mr O’Neill may be entitled, as a consequence of his long involvement in the project and his obvious significant contributions to it, is currently shrouded in mystery.
It is in these circumstances, the court must assess the injury and inconvenience likely to arise for each of the respondents, if the injunction continues in its present form. I accept that it will be inconvenient to Mr Sommariva and Pajo Projects Pty Ltd, if the completion of the development is delayed in the sense that all the apartments in the development, which need to be sold, in order to pay costs and discharge the mortgage to RMBL, do not occur as soon as is practicable.
In addition, the clear terms of the joint venture agreement envisage that Mr Sommariva, as the builder of the project, would be paid prior to the distribution of any profits to the joint venturers. In my view, the evidence regarding the sums due to Mr Sommariva is not clear. No doubt this will be a subject for investigation if and when the matter proceeds to hearing.
The difficulty arising in this case, which confronts both Mr Shanahan and the court is that it is currently impossible to calculate if the development will yield some form of profit, after all loans and other expenses are properly acquitted, after all the apartments concerned have been sold, including Apartment xx and possibly xx. If a profit is generated, it is conceivable, in my view that a portion of it will flow through to Mr O’Neill in some form or other.
As I indicated, during the course of the hearing on 24 November 2022, in my view, this was a case which was eminently capable of resolution on a consensual basis pending Mr Shanahan being provided with information regarding the final reconciliation of the joint accounts of the project, particularly the final amount required to be paid to RMBL under clause 13.1 and 13.2 of the joint venture agreement. Regrettably, this was not possible.
Given the uncertainty about whether the joint venture will or will not ultimately yield a profit, the need or otherwise of the joint venturers to dispose of Apartment xx and xx to pay expenses arises as an issue and if so what are to be the mechanics of such disposal. It would appear to be Mr Dal Cin’s submission that it may be unfair to the joint venturers (and by extension to the creditor(s) Mr Shanahan represents) if one apartment is sold and one is not, particularly if Apartment xx ultimately is transferred to Pajo Projects Pty Ltd pursuant to clause 14.1 of the joint venture agreement.
The chief injury, which will be inflicted on the respondents, if the injunction continues in its current form, is the potential for the monies owed to RMBL to compound as further interest accrues. It being inevitable that RMBL will have to be paid and the longer this is deferred the greater the sum required will be, with a commensurate drop in potential profits.
Neither Mr Dal Cin nor Mr McCarthy are discomforted at the prospect of Apartment xx being sold and its proceeds going to RMBL. Indeed, it is the submission of Mr McCarthy that the sale is inevitable under the terms of the joint venture. I am unclear as to why the same considerations do not apply to Apartment xx.
The attitude of Mr O’Neill personally to such an outcome is axiomatically not known to me and how the mechanics of him vacating the property are to be managed is similarly opaque. In addition, I have not been advised, with any precision, as what is the timetable for the sale and settlement of each of the unsold apartments, including xx, in the context of either a hearing of Mr Shanahan’s application or some form of mediation of the dispute between him and the respondents concerned.
As indicated above, in determining whether to grant the injunction sought and the determine any conditions which pertain to it, the court is directed to consider both the nature of the rights asserted by Mr Shanahan and the practical consequences likely to ensue for all concerned if the injunction continues. It would seem that the potential sale of Apartment xx would have to be mediated between Mr O’Neill and Mr Sommariva. Again, how such a discussion would play out is unknown to me, as is the likely timeframe for the settlement of any such sale.
In my view, given the financial complexities necessarily implicit in the joint venture agreement and its final implementation, for the court to assess all the practical consequences which arise in the case, is close to impossible in the current evidentiary context. The central issue being what will be the extent of profits, if any, available to be distributed between the joint venturers, once principally RMBL and Mr Sommariva have been paid what is due to them. This is not known to me but the extent of such profit must dictate the viability or otherwise of Mr Shanahan’s application in these proceedings.
The power granted to the court pursuant to section 30 of the Act is broad in its terms. They are facultative in nature. This was the view taken by Pincus J in Bayles. His Honour indicated that there may be cases, where uncertainty arises as issues germane to the bankruptcy, where prevailing circumstances may render necessary the making of interlocutory orders to hold the position, pending further information becoming necessary.
In my view, this is one such case. The chief uncertainty being the precise amount due to Mr Sommariva and the overlap of this sum with any monies advanced to him, by RMBL, as progress payments. A balance must be struck balancing the potential inconvenience to each of the parties concerned.
In my view, such a balance will be properly struck, if the injunction preventing dealings with Apartment xx is discharged but as a corollary of this the respondents are restrained from disbursing the proceeds of any sale to Mr Sommariva personally in his capacity as the builder of the development.
This will enable payment to be made to RMBL and will advance the process of ascertaining the extent of profits available for distribution between the joint venturers concerned. It may also reveal what they envisage is to occur so far as Apartment xx is concerned.
One of the difficulties arising from such an approach is that, as previously described, the equitable charge lodged on the title of Apartment xx, in Mr Sommariva’s favour, cannot be discharged until the full amount so charged is satisfied. No potential purchaser, for obvious reasons, will be inclined to settle until the charge is withdrawn. In my view, this is a dilemma which only those advising Mr Sommariva can resolve.
In technical terms, I accept that Mr Sommariva and Pajo Projects Pty Ltd are distinct entities. I also accept that there is a building contract between the joint venturers and Mr Sommariva, pursuant to which the latter is entitled to receive payment. Although, as previously indicated, I am unaware as to how such payment is to be calculated.
As such, Mr Sommariva was entitled to institute proceedings against the joint venturers to secure his contractual entitlements. In this context, given the terms of the joint venture, I can readily appreciate why he would seek to secure the resulting charge over only Apartment xx rather than over the apartment, which he could potentially look to retaining as part of his share of the profits.
Its effect may well be to secure the payment of the money due to him as the builder of the development, as well as to secure a share of the profits as a joint venturer, at the cost of his fellow joint venturer, Mr O’Neill. The probity of this arrangement and its consequences, in practical terms, for any of the creditor(s) of Mr O’Neill is likely to be another issue which will be examined at the final hearing stage.
For all these reasons, I will discharge the ex parte injunction made on 17 October 2022 and in lieu thereof discharge each of the first, second and fourth respondents disbursing any of the proceeds of the sale of Apartment xx to any entity other than the registered mortgagee RMBL.
All concerned agree that the sale of Apartment xx is inevitable and given that it is a secured creditor and in control of the sale, RMBL will have first call on the proceeds to apply towards its mortgage. What is unknown, certainly to me, is what if any surplus will be available. The intent of the proposed injunction is to prevent the disbursement of the surplus to any of the other creditors, particularly Mr Sommariva. Whether such an injunction is feasible, in practical terms, given the nature of the secured charge, may well be problematic.
I am well aware that the effect of Mr Sommariva’s evidence is that, from his perspective, due to all manner of unforeseen exigencies, the 250 East project has been a financial disaster. Whether that is so I am not in a position to resolve at this stage. It will be the subject of the final hearing, if the parties themselves are unable to resolve the issues arising between them.
The major issue being what profit, if any, is available for distribution between the joint venturers concerned, when all the expenses arising from the development have been paid. It is in this context that the court will have to determine what sums are due to Pajo Projects Pty Ltd, on the one hand and 250 East Pty Ltd and in substitution thereof, as a consequence of Mr O’Neill, to the Trustee pursuant to the provisions of the Act.
I would hope, if and when such a sum has crystallised, the parties will be in a position to enter into some form of discussion regarding the disposition of the sum between them in the context of what are likely to be the costs of a final hearing bearing in mind the commercial realities of the situation.
I will fix the parties’ competing applications for hearing on 19, 20 & 21 June 2023 and list the matter for directions on 6 February 2023 at 9:30am to deal with any directions which are necessary to prepare the matter for such hearing. At this stage, I will also inquire of the parties as to whether they believe that this is a matter which might be usefully sent to some form of mediation, either court based or private.
Perhaps also by this time, it will be possible for a schedule to be provided of which apartments have been sold, for what sums and what is the position vis-à-vis RMBL. In addition, it may be possible that there will have some clarification of the exact sum due to Mr Sommariva in the context of invoices provided to him to the joint venturers.
It will also necessary for Mr O’Neill to be provided with these reasons for judgment so that the court can ascertain whether he will wish to be heard in respect of the issues which pertain to him, particularly his status as the current occupant of Apartment xx. I will make the orders for substituted service of the relevant documents in this matter, as proposed, along with a copy of these orders and reasons for judgment.
For all of these reasons, the orders of the court will be as set out at the commencement of these reasons for judgment.
I certify that the preceding one hundred and fifty (150) numbered paragraphs are a true copy of the Reasons for Judgment of Judge Brown. Associate:
Dated: 13 December 2022
SCHEDULE OF PARTIES
ADG 265 of 2022 Respondents
Fourth Respondent:
PAJO PROJECTS PTY LTD ACN 158 823 119
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