183 Eastwood Pty Ltd v Dragon Property Development & Investment Pty Ltd

Background

1. The appellant company was incorporated to undertake the acquisition and development of residential land in Eastwood via a unit trust of which it was trustee. The majority unitholders were companies controlled by the "true" officeholders of the appellant, who in April 2018 were Mr Eric Lin and Mr John Lau as directors and Mr Steve Ju as secretary.
2. The issue in the underlying proceedings was whether the appellant was bound by that deed, by which it purported to agree to transfer 19 units in the trust to the respondent for an amount of $1,672,000. That deed was executed for its part by Mr Scott Chan, falsely representing himself to the respondent to be the sole director and secretary of the appellant. He did so with the benefit of the results of a search of the Australian Securities and Investments Commission (ASIC) companies database current as at 22 March 2018, which showed that a Mr Scott Chan was the sole director, secretary and shareholder of the appellant.
3. That had come about as follows, and remained the position until 22 June 2018 when the ASIC records were corrected. In January 2018, and without the knowledge or approval of the true officeholders of the appellant, Mr Chan had caused forms to be lodged with ASIC which recorded that he was the company's sole director, secretary and shareholder. The fact that those "false" forms had been lodged became known to those officeholders by 26 February 2018. They also became aware by that time that he had changed the registered office and place of business of the company and raised money by mortgaging the land the company proposed to develop. Between February and early June 2018 those officeholders allowed those incorrect entries to remain on the register in the expectation that arrangements which they had then made with Mr Chan and a company controlled by him, for the transfer of a majority of the units in the trust to them, would be completed. An amount of $4 million was advanced under the mortgages purportedly given by Mr Chan on behalf of the appellant, which were then registered. The appellant later brought proceedings against the three mortgagees, who by that time had exercised powers of sale resulting in the receipt of net proceeds totalling $6,725,000. Those proceeds were then paid into court in proceedings commenced in 2018 by the appellant and some of its unitholders against those lenders, Mr Chan and others (including an accounting firm and a law firm) (the 2018 proceedings).
4. The deed of agreement with the respondent was not performed and the moneys paid by it into a bank account controlled by Mr Chan were not repaid. In March 2019 the respondent commenced the underlying proceedings against Mr Chan and the appellant to recover the amount of $1,672,000. As first formulated, its claim was that Mr Chan had engaged in misleading or deceptive conduct in relation to the respondent's proposed investment in the development, and that the appellant had been knowingly involved in that conduct. The relief sought was a declaration that the April 2018 deed was void ab initio, and judgment for $1,672,000 as loss and damage suffered by reason of that conduct. That pleaded claim did not proceed.
5. On 6 September 2021, more than three years after the respondent had first become aware of Mr Chan's fraud, it purported to terminate the agreement constituted by the April 2018 deed. Three months earlier in about June 2021, the net proceeds of sale recovered in the 2018 proceedings had been released to the appellant and used "to repay its debts and part of the loans owing to its unitholders". Those loans, at the outset totalling about $8,961,254, had been made to and used by the appellant to acquire and prepare the lands for development.
6. In October 2021 the respondent amended its claim to one for damages against the appellant for breach of the agreement made by Mr Chan on its behalf, he acting within his "ostensible" authority by reason of the company having "armed" him with the "means to represent to the world that he was its sole director and secretary and able to sign documents in its name" (J[29]). The primary judge upheld that claim, finding that the company held Mr Chan out "as possessing authority to bind [it] to contracts like that" and that it did so by its true officeholders permitting the ASIC register to continue to record (incorrectly) that he was the sole director and secretary of the company (J[50]).

The principal issue in the appeal

1. The principal question in the appeal is whether the primary judge erred in so concluding. As the primary judge acknowledged, unlike the position in Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd (1975) 133 CLR 72; [1975] HCA 49 and Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35, the appellant was not found to have directly provided any documents to Mr Chan by which he could represent that he had authority to act on its behalf. Nor did it lodge the falsely completed forms with ASIC, or subsequently ratify or authorise Mr Chan's conduct in having done so (J[42]-[43]).
2. The respondent did not rely on ss 128(1) and 129(2)-(3) of the Corporations Act 2001 (Cth) because the information on the ASIC register on which it had relied was not "provided by the [appellant] company" and because the actions of Mr Chan did not constitute any "dealing" between the respondent and the appellant company (J[28]). In those circumstances the question arose as to whether by allowing the register to remain uncorrected, thereby making it possible for Mr Chan to make reference to and invite the respondent to rely on it, the appellant did any more than permit the respondent to have the benefit of those provisions (J[31]). The primary judge concluded that the appellant did, representing by its having allowed that state of affairs to continue that Mr Chan possessed authority to bind it as its sole director, secretary and shareholder.

The stay application

1. The appellant relies on the decision of this Court in Kalifair Pty Ltd v Digi-Tech (Australia) Ltd (2002) 55 NSWLR 737; [2002] NSWCA 383. There, as here, if the stay is refused the respondent will be free to proceed to wind up the appellant following its failure to comply with a statutory demand served on 18 August 2022. The appeal would then be stayed automatically (Corporations Act, s 471B) and the stay would continue unless and until the liquidator elected to prosecute the appeal. In consequence the directors would lose control not only of the prosecution of the appeal but also the prosecution of the 2018 proceedings, which also would be stayed automatically. The company's creditors, including the respondent, would thereafter have a say in any decision to prosecute the appeal or those other proceedings (Kalifair at [21]).
2. The evidence of Mr Ju is that at the time of the challenged judgment the appellant's only asset was an amount of $69,699 in a bank account. That evidence does not treat the asserted rights of action which are the subject of the 2018 proceedings as an asset. Nor does it at all explore the nature of those claims or permit any assessment of the likelihood that they might produce a positive outcome for the company. All that is said is that the appellant is claiming "substantial" damages from the lenders and the two professional firms.
3. On 25 August 2022 the respondent obtained a garnishee order directed to the bank and, in satisfaction of that order, an amount of $47,045 was paid out of the appellant's bank account to the respondent, and applied in part satisfaction of the judgment debt. That amount is presently held by the respondent's solicitors in their trust account, and subject to an undertaking that those funds will not be disbursed or transferred from that account without further order of the Court or consent of the parties (Dragon Property Development & Investment Pty Ltd v 183 Eastwood Pty Ltd (No 3) [2022] NSWSC 1271 at [29(1)]). The appellant's remaining cash at bank is a little more than $500.
4. Addressing the principles restated in Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 at 694-695, an applicant for a stay of execution must show that it has at least an arguable case on appeal, and that there is a real risk that it will suffer prejudice or damage if the stay is not granted. The second of these requirements will be satisfied if there is a real risk that, in the absence of a stay, the making of a winding up order of the appellant company would prevent the prosecution of the appeal: see Kalifair at [18]-[24].
5. The 21 day period for the appellant to comply with the respondent's statutory demand having elapsed, the latter is entitled to proceed to wind the company up. The respondent's position is that in the absence of payment of the judgment debt it would "wish to commence winding up proceedings as soon as possible in order first to fix the relation-back date and secondly to reduce the risk of the moneys being dissipated by the unidentified third party recipients" of any such moneys.
6. Although the respondent accepts that the appellant would suffer "some prejudice" if it were wound up, it contends that this is not a case in which if a stay is not granted the consequence of a winding up will be that the appeal is not pursued. In support of that being the position, the respondent suggests that in any liquidation the liquidator might continue to prosecute the 2018 proceedings, which may yield "unspecified moneys at an unspecified time" and put the liquidator in funds to enable the prosecution of the appeal. Notwithstanding this speculation, in the face of the respondent's interest in ensuring that the appeal not proceed there remains as a real possibility that the making of the winding up order would prevent the prosecution of the appeal.
7. There are twelve grounds of appeal. Grounds 4, 5, 6, 7 and 8 address various aspects of the primary judge's conclusion that the appellant had "held out" Mr Chan as having authority to bind the company by its failure to do anything to remove his ability to use the false ASIC register. Those grounds raise the question referred to above and direct attention to the assumptions made by the respondent in relying on the statements in the register and whether they were reasonable and assisted by the appellant's conduct. In my view the arguments directed to these matters are sufficiently arguable to justify a stay of execution, provided considerations including the balance of convenience and any interests of the parties do not suggest otherwise.
8. The appellant contends that as it has no assets, the respondent will not suffer any relevant prejudice if a stay is granted. As the Court noted in Kalifair (at [25]), the loss of the respondent's right to proceed to a winding up to prevent the appeals being heard on their merits does not of itself constitute relevant prejudice for these purposes.
9. However, four matters remain to be considered, three of which are raised by the respondent. The first of those is its contention that, if the appellant is at a risk of being wound up, and to suffer prejudice as a result, that risk and any consequential prejudice is of its own making. That is said to be so because the appellant disbursed the net proceeds of sale of the mortgaged land of $6.725 million in or about June 2021; and "has not provided any justification or reason why it did not retain moneys sufficient to meet any adverse judgment against the respondent".
10. This submission does not take account of the fact that at the time those moneys were received and disbursed, the respondent's claim against the appellant was to damages for its alleged knowing involvement in any misleading or deceptive conduct of Mr Chan. By October 2021 that claim had been abandoned, and it is not obvious that in June 2021 the claim as then formulated presented a real risk of a judgment in favour of the respondent which would have justified retaining any part of the moneys paid away.
11. The second matter raised is the respondent's contention that it will suffer prejudice if a stay is granted in circumstances where it would wish to commence winding up proceedings as soon as possible in order to fix the relation-back day for the recovery by the company in liquidation of moneys paid away in June 2021.
12. The relation-back day with respect to a winding up order made under s 459A on an application under s 459P would be the date the application for the order is made (Corporations Act, s 91 item 14 and s 513A(e)). In advancing this argument the respondent accepts that it could not be prejudiced by delay in the pursuit of any "unfair preference" claim of the company in liquidation (s 588FA) because the six-month period for bringing such a claim would well and truly have passed in either of the relevant scenarios (s 588FE(2)). However, it submits the position would be different with respect to an "uncommercial transaction" which is also an "insolvent transaction", where the company's claim may be brought with respect to such a transaction occurring during a two-year period ending on the relation-back day (ss 588FB(1), 588FC and 588FE(3)). It may be accepted that such prejudice might arise if a consequence of a stay is that the relation-back day for the pursuit of such claims falls in May or June 2023 and more than two years after any such transaction was entered into or given effect.
13. However, the premise of this submission, that the payments made to creditors and unitholders of the appellant following the recovery of the net proceeds of sale of the company's land, arguably constituted an "uncommercial transaction", is also speculative in the face of the limited evidence before this Court. A transaction is an "uncommercial transaction" if and only if "it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction" (s 588FB(1)). Mr Ju's evidence is that those funds were paid to the company's creditors, including unitholders, in full or partial satisfaction of existing liabilities of the company. On the face of it, there is no basis for inferring that those transactions were not likely to be ones which a reasonable person in the company's circumstances might have entered into.
14. As to the third matter raised by the respondent, it submits that it should be a condition of any stay that the appellant pay into court or otherwise provide security for the judgment sum and an amount in respect of its costs below.
15. As this Court observed in Kalifair (at [28]), whilst the successful party is "entitled to be protected from the risk that if the appeal fails assets which earlier were available to satisfy the judgment will no longer be available for that purpose", the requirement for security "is only intended to protect the status quo, that is the existing value of [that] judgment and not to improve the position of the judgment creditor by increasing that value". It follows (as it did in Kalifair at [29]) that security for the judgment is not needed to protect the respondent from any risk of loss caused by the stay. Nor is the respondent entitled to have conditions imposed for the purpose of increasing the value of the judgment appealed from. Each of the two conditions sought by the respondent would, if imposed, have that result.
16. The remaining matter is the possibility that before the determination of the appeal, the 2018 proceedings are resolved or the subject of some compromise which produces a money outcome for the appellant. The respondent should be protected in that event so as to ensure that if such moneys become available they are not distributed or paid away without the respondent having an opportunity to contend that it is entitled to a payment or distribution of or from those funds in the event that the appeal is unsuccessful. This matter can be addressed by requiring, as a condition of the grant of the stay, that the appellant undertake to notify the respondent of any such compromise and undertake not to pay away, charge or otherwise deal with any such money without further order of the Court.

Conclusion and orders

1. For these reasons, there should be a stay of execution upon the appellant's solicitor giving an undertaking to the effect described above. There should also be an order for security for costs, as offered by the appellant. That order should not be satisfied from the funds which were received on the execution of the garnishee order, as those funds have been applied in partial satisfaction of the judgment debt. Those funds should continue to be held subject to the undertaking noted by Peden J on 20 September 2022.
2. As the appellant has succeeded in its application for the stay, which was opposed, the respondent should pay the costs of that application. There should be no order as to the costs of the respondent's security for costs application. That application was filed on the day before the hearing and not the subject of any specific evidence, and was conceded at the outset of the hearing.
3. In the result I make the following orders: 1. Order that the appellant provide security for the respondent's costs of the appeal in the sum of $50,000 by payment of that amount into Court. 2. Order that the prosecution of the appeal be stayed until the appellant has complied with order 1 above. 3. Upon the appellant by its solicitor giving the undertaking to the Court which is set out below, order that execution of the judgment in favour of the respondent in the sum of $1,672,000 and entered on 6 July 2022 and of order 2 made on 27 July 2022 be stayed until the determination of this appeal or further order of this Court. Undertaking The appellant by its solicitor undertakes that in the event that it compromises any of the claims made in proceeding number 2018/170894 in the Equity Division of the Supreme Court: 1. before giving effect to any part of that compromise it will first give the respondent's solicitors two business days' written notice of the fact of the compromise or proposed compromise; and 2. it will not pay away, distribute, charge or otherwise deal with any money to which it is entitled under or in respect of the compromise until the determination of the appeal or further order of the Court. 1. Direct that the undertaking in order 3 above be given by signing and dating that undertaking and returning it to Meagher JA's Associate. 2. Order that the respondent pay the appellant's costs of the application for the stay of execution. 3. Note that order 5 does not include any costs of the respondent's application for security for costs and that no order is made in relation to those costs.

Amendments 05 October 2022 - Order 3 amended on coversheet and at [28] pursuant to UCPR r 36.17 by inserting words "and of order 2 made on 27 July 2022" DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 05 October 2022