Solicitors:
Assured Legal Solutions (Plaintiffs)
Jones Day (Second, Fourth and Fifth Defendant)
Norton Rose Fulbright (First and Third Defendant)
File Number(s): 2022/00372454
[2]
JUDGMENT
On 15 February 2023 the plaintiffs in these proceedings, Efrem Harkham, and 10-12 Campbell Parade Pty Ltd, filed an interlocutory process seeking in the alternative freezing orders, or injunctive relief, requiring certain funds that have been or will be realised from the sale of four properties located in Sydney be held on trust until further order of the Court, or pending the determination of these proceedings.
This judgment is concerned solely with the application by the second, fourth and fifth defendants for leave to cross-examine Efrem Harkham on his affidavit made 28 August 2022, and filed with the originating process on 9 December 2022. Plaintiffs' counsel read this affidavit at the commencement of the interlocutory hearing on 10 March 2023 at which the application for leave to cross-examine was also made.
The second defendant is a company called HK Empire Pty Ltd (HK Empire), the fourth defendant is Terry Harkham, Efrem's brother, and the fifth defendant is Geraldine Harkham, Terry's wife. Consistently with the practice of the parties, and meaning no disrespect, I will hereafter refer to each of Efrem, Terry and Geraldine by their first names. The first and third defendants, The Summit Hotel Bondi Beach Pty Ltd (SHBB) and Patglen Pty Ltd (Patglen), respectively, are companies in which Efrem, Terry and Geraldine are shareholders and/or directors. SHBB and Patglen were the corporate vehicles used to purchase the real estate the sale proceeds of which are the subject of the interlocutory process. SHBB and Patglen accepted that this application is a shareholder dispute, and that they have nothing to say about the matter. Accordingly, for convenience, I will refer in this judgment to HK Empire, Terry and Geraldine collectively as the defendants.
The primary issue in dispute on the interlocutory application is whether the Court should make orders that include order 1(a) of the short minutes of order proposed by the defendants as an attachment to their written submissions. Those proposed short minutes of order provide for the proceeds of sale of the properties to be held on trust until further order or the conclusion of the proceedings generally in the manner sought by the plaintiffs. They also make provision for the payment of tax and other debts of the companies that owned the properties. Proposed order 1(a) is:
1
…(a) $10,000,000 from the SHBB RK Trust Account is to be paid to SHBB, for the purposes of SHBB repaying amounts it owes (as reflected on the accounts of SHBB) to the Fourth Defendant (Terry Harkham) and/or the Terry Related Entities (as defined in the Schedule to these orders)
The Schedule defines the "Terry Related Entities" as Geraldine and six companies, one of which appears twice: in its own name and also as trustee for what appears to be a self-managed superannuation fund.
Terry and Geraldine initially offered an undertaking in par 4 of the proposed short minutes of order in return for the carveout of the $10 million from the asset preservation order that was intended to provide protection to the plaintiffs in the event that the Court found that any recorded liabilities of SHBB were not payable.
At the hearing on 15 March 2023 the Court admitted, as Exhibit 1, a copy of correspondence between the parties' solicitors dated 13 and 14 March 2023. The email dated 13 March 2023 from the defendants' solicitors attached amended proposed short minutes of order with a revised undertaking by Terry and Geraldine:
4. Subject to these orders, or any further order of the Court, the Fourth Defendant and the Fifth Defendant undertake:
(a) that they will not dispose of, deal with, encumber or alienate [the Vaucluse Property] prior to the conclusion of these proceedings without giving 14 days' notice in writing to the Plaintiffs;
(b) to indemnify the First Defendant for the value of the repayments referred to in Order 1(a) (that is, up to $10 million) to the extent that it is determined at the conclusion of these proceedings that Terry Harkham and/or the Terry Related Entities were not entitled to receive those repayments;
(c) to provide a mortgage to SHBB over the Vaucluse Property with a maximum liability of $10 million to secure the indemnity referred to in order 4(b) above, and to take all necessary steps to ensure the mortgage is registered;
(d) that they will not take any step prior to the conclusion of these proceedings that causes the:
(i) monies in the SHBB RK Trust Account, 10-12 RK Trust Account and Patglen RK Trust Account, to be disposed of, diminished, transferred, spent, charged, pledged, encumbered or otherwise dealt with (in whole or in part);
(ii) SHBB to release the mortgage referred to in order 4(c) above,
in the absence of a prior written consent signed by both the First Plaintiff and the Fourth Defendant or their respective nominees (in respect of which, the nomination must be in writing).
The proposed undertaking now offers a mortgage over Terry and Geraldine's home, with a maximum liability of $10 million. This proposal was rejected by the plaintiffs, in a letter of 14 March 2023 that stated "the threshold problem from our clients' perspective is that they do not consider that $10m, is a justifiable amount on the information available to them." A counter-proposal to release $2.1 million of SHBB funds was made.
It is uncontroversial, and was accepted by the defendants, that cross-examination of a deponent in an interlocutory application is at the discretion of the Court. The conventional position was stated by Leeming JA in Ren v Jiang [2014] NSWCA 1 at [11]:
[11] …Cross-examination in support of an interlocutory application is not as of right but requires leave…which leave is granted "cautiously" and normally "somewhat sparingly": see the decisions collected and applied by Kenny J in Wu v Avin Operations Pty Ltd (No 3) [2006] FCA 1321 at [18]. It is common practice not to permit cross-examination at all in interlocutory matters; see, for example, Markisic v Commonwealth of Australia [2010] NSWCA 273 at [31] (Beazley and Young JJA).
In ABL Nominees Pty Ltd v Mackenzie (No 2) [2014] VSC 529 Derham AsJ summarised the factors weighing in favour of, and against, leave to cross-examine being granted in interlocutory applications (footnotes omitted):
[48] An examination of the authorities shows that the variety of circumstances in which it may be appropriate to allow cross-examination in interlocutory applications varies according to the nature of the application and the facts of the case.…There are, however, a number of factors that have been found relevant to granting leave to cross-examine, as follows:
(a) Where the credit of the witness is important to resolving the interlocutory application;
(b) The interlocutory application requires the establishment of material facts;
(c) There is a relevant factual dispute which requires cross-examination for its resolution; and
(d) The interlocutory application is unusual and it is difficult to know what issues will eventually be relevant.
[49] There are, of course, factors that will exclude or limit cross-examination, including:
(a) That the application is not made bona fide to test an issue of material fact on the interlocutory application, but rather to engage in a rehearsal of issues relevant to the trial;
(b) The extent to which the pressure of the business of the court permits cross-examination;
(c) The factors referred by Warren J (as she then was) in Yunghanns v Elfic Pty Ltd, that is:
(vii) insofar as there are inconsistencies in the evidence, that they are appropriate for submission;
(viii) insofar as there is an allegation of recent invention, this also is appropriate for submissions;
(ix) it is undesirable except in special compelling circumstances for a court to permit a party to have the opportunity at an interlocutory stage to cross-examine an opposing party upon the issue of fact that goes to the core of the proceeding. This would enable a dress rehearsal of a vital component of evidence to be ventilated at trial; and
(x) that the court would not be assisted by the cross-examination.
In Selvaratnam v St George - A Division of Westpac Banking Corp (No 2) [2021] FCA 486, Stewart J found:
[44] A relevant factor which will weigh against exercising the discretion in favour of allowing cross-examination in an interlocutory application is if the proposed cross‐examination will involve a rehearsal of, or dry run at, the issues relevant to the trial. Such a cross‐examination will trespass upon issues of fact that go to the core of the proceeding, and it may give an unfair advantage to one side. See Scanlon at 273; Yunghanns v Elfic Pty Ltd (No 2) [2000] VSC 113; (2000) 1 VR 92 at [18] per Warren J; Dale v Clayton Utz (a firm) [2012] VSC 577 at [77] per Hollingworth J; ABL Nominees Pty Ltd v Mackenzie (No 2) [2014] VSC 529 at [49] per Derham AsJ.
In Dale v Clayton Utz (a firm) [2012] VSC 577, Hollingworth J considered the decided cases and, at [79], allowed for cross-examination on prescribed topics, as there was:
[79]…[a] relevant factual dispute which require[d] exploring by cross-examination. In circumstances where [the deponent had no such recollection], it is fair and reasonable to allow [the defendants] an opportunity to test [the plaintiff's] recollection of their contact, subject to some important limits.
The defendants' application for leave to cross-examine Efrem must be considered in the context of a brief outline of the issues in the proceedings.
As noted, the plaintiffs filed their originating process on 9 December 2022. In accordance with an order of the Court, the plaintiffs filed a statement of claim on 2 March 2023. As this judgment is not a determination of the application for relief in the interlocutory process itself, it will be sufficient to set out the substance of the allegations in outline. Relevantly:
1. From about 1978, Efrem and Terry have been parties to a quasi-partnership or multiple quasi-partnerships to purchase and hold as long-term investments, residential and commercial real property within Australia to be managed by Terry: [8]. (I have ignored, as immaterial for present purposes, allegations concerning the involvement of a third brother, Uri Harkham, who is not a party to these proceedings).
2. Terry owed specified fiduciary duties to Efrem, including as a result of being part of the quasi-partnership or quasi-partnerships: [14].
3. Terry caused Geraldine to be registered as a director of Patglen without Efrem's knowledge or consent contrary to the quasi-partnership, and in breach of fiduciary duty: [23].
4. Efrem is entitled to one half of the issued shares in Patglen: [24].
5. Terry caused Geraldine to be registered as a one third shareholder in and director of SHBB without the knowledge and consent of Efrem contrary to the quasi-partnership, and in breach of fiduciary duty: [44].
6. Efrem is entitled to one half of the issued shares in SHBB: [45].
7. Alternatively, Geraldine holds one half of her shares in SHBB on trust for Efrem: [46]-[49].
8. In breach of the quasi-partnerships and fiduciary duty by Terry, he caused Patglen and SHBB or related companies to acquire properties in circumstances where Geraldine held one third of the shares: [52]-[57].
9. It was a breach of the quasi-partnerships and fiduciary duty for Terry and Geraldine to use their majority shareholding and directorships in the management of SHBB: [104].
10. In about 2022 Efrem and Terry agreed that the properties referred to in prayers 1 and 2 of the interlocutory process would be sold. Terry and Geraldine have purported to misuse their powers as the majority directors of SHBB in relation to certain aspects of these sales: [116]-[130]
11. In particular, Terry and Geraldine have threatened to apply part of the proceeds of sale of the properties to repay alleged loans to Terry or to make payments to Terry to be deducted from his loan account: [126].
12. Efrem has not been invited to any meeting of a company to consider any resolution to lend money to Terry, to borrow money from Terry and as to the application of any proceeds of sale of the property referred to in prayer 1 of the interlocutory process, nor has Efrem been consulted as to those matters: [127], [128].
13. Terry and Geraldine caused the sale of the properties referred to in prayer 3 of the interlocutory process: [131]-[142]. Terry caused the deposit of $689,750 from the sale of one of the properties to be paid by Patglen to Terry personally: [135], [136].
14. The payment of the deposit to Terry was explained on the basis that Patglen was indebted to a company called Negev Investments Pty Ltd (Negev), and as a result of the deregistration of Negev Terry became entitled to an in specie distribution: [139].
15. Negev was deregistered at the time of the payment to Terry, Patglen was not liable to make any payments to Terry on behalf of Negev, and Efrem is not aware of any debt owed by Negev to Terry: [140(a)-(c)].
16. Efrem was unilaterally and wrongly removed as a shareholder of Negev shortly prior to the distribution of the assets of Negev to Terry and the deregistration of Negev was preceded by a members' voluntary liquidation: [140(d), 140(e)].
17. The payment of the deposit by Patglen to Terry was not for a proper purpose of either Patglen or the quasi-partnership: [140(g)].
18. Efrem, being a shareholder and director of Patglen and a partner of Terry in the quasi-partnership to whom fiduciary duties are owed by Terry has objected to the proceeds of sale being disposed of by Patglen as directed by Terry and Geraldine: [141].
19. Terry has caused SHBB and Patglen to make payments for his own personal purposes or the purposes of his family, related entities and associates in amounts, as presently known to Efrem, totalling $50,832,533.54: [143].
20. Efrem has not been invited to any meeting of SHBB or Patglen to consider any resolution to make these payments, nor has he been consulted by Terry in respect of them: [144], [145].
21. The payments were not for a proper purpose and were made in breach of the fiduciary duties owed by Terry: [146], [147].
22. The details of the payments are pleaded in [148]-[215].
23. Terry has asserted the existence of loans that he has made to SHBB and Patglen or liabilities owed by these companies to Terry, and caused such loans to be recorded in the financial records of the company and relied upon the purported existence of such loans as a justification for payments made to him, family members, related entities, and for personal expenditure from the resources of SHBB and Patglen: [216].
24. Efrem is unaware of any advances of funds made by Terry to SHBB or Patglen and Efrem has not been invited to any meeting of directors or shareholders of SHBB or Patglen to consider any resolution to approve borrowing of funds from Terry or the incurring of liability to Terry and Efrem has not been consulted by Terry regarding those matters, which involve breaches of Terry's fiduciary duties: [218]-[221].
25. Terry and Geraldine have caused Patglen and SHBB to grant charges over their assets without Efrem being invited to a meeting to consider any resolution to grant the charges and without Efrem being consulted about those matters, in breach of Terry's fiduciary duties: [222]-[236].
26. Efrem has not received satisfactory responses to his requests as a shareholder and director for the provision of information to which he is entitled by statute: [237]-[247].
27. On the basis of the facts alleged in the statement of claim, Efrem seeks orders:
1. that Terry account to him for breach of fiduciary duty: [248], [249];
2. for relief for oppression under s 233 of the Corporations Act 2001 (Cth): [250]-[254];
3. for the winding up of SHBB and Patglen by operation of ss 233(1)(a), 461(1)(e), (f), (g) and (k) of the Corporations Act [255]-[261]; and
4. that Efrem owns half of the shares in SHBB or that Geraldine holds half of her shares in SHBB on trust for Efrem on the basis of an estoppel [262]-[266].
As noted above, as the defendants accept that, save for SHBB and Patglen being permitted to pay certain third-party liabilities, the net proceeds of sale of the properties should be held on trust for SHBB and Patglen, the only interlocutory question that remains is whether the Court should permit the carveout of $10 million to be paid out of the money held on trust for SHBB for the purpose stated in order 1(a) of the defendants' proposed short minutes of order, on the basis of the protection offered to the plaintiffs by the undertakings of Terry and Geraldine in revised order 4.
The objective of the plaintiffs' interlocutory application is to preserve the assets of SHBB and Patglen for the benefit of Efrem as a shareholder of those companies. Efrem's status as the holder of at least one third of the shares in SHBB and Patglen is sufficient to give him standing to apply for the interlocutory relief that he seeks. His entitlement to that relief does not depend upon his prospects of success on his claim against Terry for an account for breach of fiduciary duty arising out of the alleged quasi-partnership or partnerships. It does not make a difference to Efrem's entitlement whether he is entitled to one half of the shares in SHBB as claimed, or only the one third that he now holds. It is immaterial to Efrem's entitlement to the interlocutory relief that he seeks whether the assets of SHBB and Patglen are limited to the net proceeds of the sale of their properties, or whether the assets of one or both companies should be augmented by the Court's final determination as to the loans owed by, or to, Terry and the Terry Related Entities.
Consequently, the issue of whether the Court should make an asset preservation order on the terms proposed by the defendants will not require the Court to form a view as to Efrem's prospects of success on all of the claims made in the statement of claim. As explained, some of those claims if successful, will increase the value of Efrem's entitlement as a shareholder in the companies but it will not affect his entitlement to have the assets of the companies preserved.
The Court's consideration of the order that should finally be made on this application must start by focusing on the liabilities of SHBB that the defendants want SHBB to be able to satisfy by means of the carveout in proposed order 1(a). That carveout would entitle SHBB to repay "amounts it owes (as reflected on the accounts of SHBB)" to Terry and/or the Terry Related Entities.
If the orders sought by the defendants are made, then Terry and Geraldine, as the present majority directors of SHBB, will be able to cause the company at their election to pay to Terry or Terry Related Entities the amounts of any liabilities that are recorded in SHBB's accounts up to a maximum of $10 million.
In relation to these liabilities, the defendants' solicitor's 7 March 2023 affidavit provides:
1. at [10(a)] that, although the solicitor has not had time to obtain detailed instructions in relation to the statement of claim, "the financial contributions made by Terry and the Terry Related Entities…to SHBB, much of which have been over the years, and continue to be, recorded as loans owed by SHBB in the in the accounts and financial statements of SHBB"; and
2. at [23(a)], that the $10 million should be released to SHBB "to repay loans currently existing and recorded in its financial statement for 2021 and draft financial statement for 2022 as being owed to Terry and Terry Related Entities".
SHBB's financial statements for the year ending 30 June 2021 are contained at Vol 4, pp 3180-3185 of the court book. The defendants' solicitors 7 March 2023 affidavit states at 45(iv) that the 2021 balance sheet provides that SHBB has "long term liabilities includ[ing] amounts owing by SHBB to:…(iv) Terry and Terry Related Entities in the total amount of $20,446,204.34".
The evidence presently before the Court does not disclose the facts that have given rise to the alleged liabilities as recorded.
In principle, the appropriateness of the Court making the proposed order 1(a) would depend upon the evidence of the strength of the defendants' claims that those liabilities are valid and enforceable, and perhaps also whether the terms of the liabilities disclose that they are presently due and payable. If a liability were shown to be valid and presently due and payable, it might be difficult for the Court to justify an order that restrained SHBB from satisfying the liability. That may particularly be so in the case of Terry Related Entities other than Geraldine, who are not parties to the proceedings, and in whom third parties may have interests, even if only as creditors. The Court would not be justified in casually ignoring the corporate veil.
The evidence on the present application does not permit the Court to form a prima facie view as to the validity of any of the liabilities, whether they are presently due and payable, or whether any third parties have any interest in the satisfaction of those liabilities that ought to be taken into account when the Court considers whether it should make an order that restrains SHBB from satisfying them.
If it were shown that the real beneficiaries of SHBB being permitted to satisfy particular liabilities were Terry and Geraldine, then it may be legitimate for the Court to have regard to the possibility that, as a result of the final determination of these proceedings, Terry and Geraldine may have a liability to SHBB or Patglen. That is, in considering the balance of convenience, it would be relevant for the Court to take into account the possibility that a de facto set off ought to be enforced to obviate the risk that, if SHBB is permitted to satisfy liabilities to Terry or Terry Related Entities, funds may not ultimately be available to satisfy orders that may be obtained by Efrem on the final hearing.
It appears that in the present case, the Court will not be able to make any interlocutory determination based upon even prima facie conclusions about matters relevant to the validity of the liabilities or the possibility of countervailing liabilities against which they should be set off.
There is also no evidence that would permit the Court to form any prima facie view about the legitimacy of the payments totalling $50,832,533.54 listed in [143] of the statement of claim. At present, Efrem's claim is no higher than that he was not invited to any meeting to consider any resolution as to the making of the payments and he was not consulted. It remains possible that, as Terry and Geraldine have been a majority of directors, and in the case of SHBB, a majority of shareholders, that the payments were authorised and legitimate.
It is in these circumstances that the Court must consider the reasons offered by the defendants in support of their application for leave to cross-examine Efrem.
The underlying proposition advanced by senior counsel for the defendants was that the weaker the plaintiffs' case, the greater the significance the balance of convenience will assume: T 21, 10 March 2023. The defendants seek to establish that the plaintiffs' case is very weak, so that the balance of convenience should fall in their favour.
As I have explained above, I do not accept this proposition as a generality insofar as it applies to the strength of all of the plaintiffs' claims in the statement of claim. The argument may be valid, insofar as it applies to claims that may in some appropriate way justify a de facto set off against the liabilities that the defendants want SHBB to be able to satisfy.
Senior counsel for the defendant also supported the application for leave to cross-examine by making the following submissions on 10 March 2023, T 29.48 - 30.23:
Now, if in the witness box he withdraws the allegations, then your Honour has the proper factual foundation for which to assess this interlocutory application. If he maintains them, then so be it, your Honour has to deal with it on a prima facie case level, but our contention will be that faced with the material that he is aware of, he can't maintain the allegations and he will withdraw them. And then your Honour has the proper factual fight upon which to assess the application that is being brought by my learned friends because at the moment as things stand your Honour is presented with a story which doesn't hold up, which we suspect Efrem will have to, if he is being honest in the witness box, withdraw and therefore your Honour has the proper factual fight in assessing the interlocutory application.
So we wish in a sense to give him the opportunity to withdraw allegations that he has made on verification. If he does so, then the nature of my learned friend's case changes; he doesn't have really a very strong case at all and that will obviously feed into the balance of convenience.
Now, if he stands by his allegations in the witness box, then your Honour will have to assess that case as articulated and on a prima facie level. Your Honour might say "well, I have got this allegation, I have to deal with it on a prima facie level", but that will have consequences down the track at final hearing if he maintains allegations which are not truly maintainable.
That's not the purpose for which I'm cross examining, I am really giving him the opportunity to withdraw allegations so your Honour has the proper factual foundation for the fight on an interlocutory basis.
As senior counsel recognised, it will not be legitimate in the light of the authorities considered above, for the Court to permit cross-examination at the interlocutory stage if the real purpose or effect is to cause Efrem to decline to withdraw an allegation that he has made, which may have the effect of undermining the plaintiffs' case at the final hearing.
When required by the Court to state the subjects upon which the defendants sought leave to cross-examine Efrem, senior counsel identified two matters that must be considered separately.
The first related to a desire by the defendants to cause Efrem to concede, by reference to share transfers signed by him and a resolution of the members of Negev that it be wound up voluntarily, that the plaintiffs' claims in [140(d)] and [141] of the statement of claim are false, because Efrem himself transferred his shares in Negev to Terry and Efrem voted in favour of the members' voluntary winding up of the company. The defendants propose to rely upon the documents in the court book at Vol 5 pp 3629, 3633, 3640 and 3647. On their face, these documents appear to show:
1. On 23 January 2017, Efrem, along with Terry, Geraldine, Uri and Naji Harkham signed a copy of ASIC Form 420 "Declaration of Solvency" for the purposes of ss 494(1) and 494(2) of the Corporations Act in their capacity as directors of Negev. The form recorded an estimated surplus of $8,853,056, and was lodged with ASIC on the same date (pp 3644-3647);
2. On 30 September 2019 Maggie Liu, a tax and advisory partner from Deloitte, sent an email to Saul Katzeff (who Efrem deposes at [315(e)] of his 28 August 2022 affidavit "is a financial manager acting in the interests of Terry…[and] is not known to me to have any role in the management or properties held by SHBB and Patglen, nor any roles in these companies") which stated (pp 3629-3630):
"…there were discussions previously with you, Terry and Ian in relation to wrapping up Negev. We have gone through what we have for share transfer and there are a few signatures we need to have. Attached are the share transfer forms for Negev Investment Pty Ltd [sic]. Can you please get them signed per the instruction below:
[tables recording the number and class of shares to be transferred from Uri to Terry and Efrem to Terry]
Both Terry and Efrem need to sign (emphasis in original)…Once they are signed, we will pass them to the liquidator and the liquidator can get the shares transferred before the liquidation"
1. On 30 October 2019, Saul Katzeff sent an email in reply to Maggie Liu stating "attached are the signed forms" and attaching 12 signed "standard transfer form" for various classes of shares in Negev between Uri, Terry and Efrem, each of which are undated: p 3629-3643. The transcript of 10 March 2023 records that senior counsel referred specifically to two of these forms (T 29.30-29.36). The first records the transfer of 14 A Class shares from Uri to Efrem: p 3633, and the second records the transfer of 44 A Class shares from Efrem to Terry: p 3640. Senior counsel submitted, and it appears, that Efrem's signature is on these forms. It is true that some of the transfer forms record Efrem as the transferor, however it is not clear if all of Efrem's shares were transferred to Terry from this limited selection of documents, particularly given that Efrem is listed as the transferee on four of the forms (as recipient of Uri's shares).
This aspect of the proposed cross-examination is only relevant to the issue of whether the payment by Patglen of the deposit of $689,750 under the contract for the sale of one of the properties the subject of prayer 3 of the interlocutory process to Terry was authorised. As explained above, on the basis of the allegations in the statement of claim, it appears that the defendants have justified the payment on the basis that Patglen was indebted to Negev for an amount of at least the value of the deposit and the deposit was paid to Terry because he was entitled on to an in specie distribution of the assets of Negev prior to its deregistration following the members voluntary winding up of an amount of at least the value of the deposit.
The defendants have not provided submissions to the Court on their application for leave to cross-examine Efrem on this issue concerning the significance of the available evidence as to whether Patglen was indebted to Negev, the circumstances in which the resolution was made to wind up Negev, and the consequences of the winding up in relation to whether an in specie distribution became payable to Terry that was equal to or greater than the amount of the deposit. Consequently, the Court is not in a position to assess what the significance would be to the outcome of this interlocutory application if Efrem were to admit in cross-examination that he had signed a transfer of his shares in Negev to Terry and that he had joined in the resolution of members to voluntarily wind up Negev.
If the cross-examination were successful and Efrem made the admissions sought, that evidence would tend to support an interlocutory finding that the payment by Patglen of the $689,750 deposit to Terry was authorised. That finding would have the tendency of reducing the value of Efrem's shares in Patglen upon its winding up. For the reasons I have already given, that is not a possibility that has any real bearing on the issue of the terms upon which the Court should make an asset preservation order in this matter. The carveout proposed in by the defendants in order 1(a) only concerns the assets of SHBB and not the assets of Patglen.
In these circumstances, I propose to decline the defendants' application for leave to cross-examine Efrem on the subject of his involvement in the transfer of shares in Negev and the resolution of members to voluntarily wind up the company. I consider that the possible consequences of that cross-examination are too remote from the issues on which the interlocutory application will be decided to warrant leave being given.
The second subject for cross-examination upon which the defendants sought leave concerns the related allegations in the statement of claim at [218], [219], and [244]: T 29.41. Those allegations, which have been outlined above, are to the effect that Efrem was unaware of any advances of funds made by Terry to SHBB or Patglen, and was not invited to any meeting of directors or shareholders of either company to consider any resolution to approve the borrowing of funds from Terry and that he was not consulted on the subject. Furthermore, the plaintiffs allege that Efrem's requests for the information to which he was entitled as a shareholder and director was not provided to him.
The defendants' senior counsel's submission on this aspect of the application was, T 29.41-29.46:
The next series of allegations which we would wish to ask him some questions about are at 218 and 219 of the pleading, being contentions that he was unaware of the advances of funds made to Terry and by Terry to the company SHBB; does he maintain that allegation in light of the material that he has access to, and then at 244 that he has been denied access to many documents including documents concerning the loans.
The defendants wish to challenge Efrem's claim that he was unaware of the advances of funds made to Terry and by Terry to SHBB. Mere "awareness" of the alleged transactions would not be material, but awareness may be relevant to the balance of convenience if it could support an argument by the defendants that Efrem has unreasonably delayed in bringing these proceedings or that delay may have caused the defendants to understand that Terry acquiesced in or approved the transactions.
Ultimately, as I have explained above, the remaining issue on this interlocutory application is whether the Court should permit the carveout proposed by the defendants in order 1(a) so that SHBB will be able to pay liabilities that appear in its accounts. Although, as I have also explained, the evidence does not permit the Court to make provisional findings concerning the validity of the liabilities or the strength of the plaintiffs' claims that loans by and to the companies by Terry and Terry Related Entities may not have been authorised, I accept the defendants' submission that Efrem's awareness of the transactions disclosed in the companies' accounts may be significant on the issue of the balance of convenience. Essentially, the plaintiffs urge the Court not to accept the undertakings offered by Terry and Geraldine in proposed order 4 as not providing adequate security for the carveout in order 1(a). Strictly, the adequacy of the undertakings in proposed order 4 may be influenced by the Court's assessment of the evidence going to the probability that loans by or to the companies by Terry and the Terry Related Entities were genuine. As the evidence does not permit the Court to make provisional findings on that subject, it is possible that evidence concerning Efrem's awareness that the transactions had been recorded in the companies' accounts may be decisive on the balance of convenience, at least in so far as that awareness may be shown to involve delay, acquiescence or approval.
The evidence relied upon by the defendants concerning their need for SHBB to be permitted to satisfy the liabilities contemplated by proposed order 1(a) is in my view relevant to whether they should be given leave to cross-examine Efrem on the issue of his awareness of the loan transactions. That evidence is given at [26] of the defendants' solicitor's 7 March 2023 affidavit in the following terms:
[26] I am informed by Terry that he requires access to the funds to be released pursuant to the Interim Proposal to pay for living expenses, loan obligations, legal and professional service fees (including those being incurred in relation to the two USA proceedings referred to in paragraph 11 above) and other expenses and operating costs associated with the other properties and investments that Terry owns or controls. I am informed by Terry, and believe, that he does not otherwise have access to cash (as opposed to other assets which would have to be sold or encumbered) to fund these expenses and that he was depending on the receipt of the proceeds of sale from the Bondi Properties to provide him with funds to meet these expenses. Without limitation, I am informed by Terry that this includes:
(a) approximately $400,000 required by Terry to fund a townhouse development project in Katoomba in respect of which Terry has an interest;
(b) approximately $500,000 required by Terry for a development project in Victoria which is due over the next month, with a further obligation of $200,000 payable for subdivision and infrastructure works later in the year;
(c) approximately $500,000-$1,000,000 required by Terry for renovation works to a motel in Echo Point planned to commence in July 2023 in respect of which Terry has an interest; and
(d) approximately $4,800,000 payable by Terry in the final quarter of 2023 to fund the commencement of construction of a development project in Katoomba in respect of which Terry has in [sic] interest.
This evidence establishes that Terry may suffer substantial prejudice if the interlocutory orders made by the Court do not include the carveout in proposed order 1(a). Efrem seeks to resist the carveout, largely on the basis that he was unaware as a shareholder and director of SHBB of the loan transactions shown in the accounts of the company as between SHBB and Terry and the Terry Related Entities. As Efrem has taken that position, and as the true state of Efrem's awareness may be relevant to the balance of convenience and whether the Court should permit the carveout in exchange for the undertaking offered by Terry and Geraldine, it will be appropriate to permit the defendants to cross-examine Efrem on the subject of his awareness of the transactions.
Accordingly, I will grant the defendants leave to cross-examine Efrem limited to his awareness of the transactions that the plaintiffs seek to impugn in these proceedings, relating only to loans or other liabilities in the accounts of SHBB.
As accepted by senior counsel for the defendants in submissions, the cross-examination at this interlocutory stage will be limited to direct questions (in the sense, allowing some reasonable latitude, that the cross-examination will not take place as on a final hearing).
[3]
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Decision last updated: 29 March 2023