Anthony Magafas & Anor v Peter Carantinos & Ors

CATCHWORDS : [SECURITY FOR COSTS] - Where assignment of action to corporation with no assets - [ACCOUNTS] - Whether accounting party reasonably characterised as moving party or plaintiff - Whether security should be ordered

Civil Procedure Act 2005 (NSW) LEGISLATION CITED : Corporations Act 2001 (Cth) Uniform Civil Procedure Rules 2005 (NSW)

Anthony Magafas & Anor v Peter Carantinos & Ors [2007] NSWSC 416 Gray v BNY Trust Company of Australia Ltd [2009] NSWSC 789 CASES CITED : Idoport Pty Ltd v National Australia Bank Limited [35] [2001] NSWSC 744 Rajski & Anor v Computer Manufacture & Design Pty Ltd & Ors [1982] 2 NSWLR 443 Tomlinson v Land & Finance Corporation Ltd (1884) 14 QBD 539 Willey v Synan (1935) 54 CLR 175

Anthony Magafas (First Plaintiff) PARTIES : Pac-Com Pty Limited (Second Plaintiff) PCM Nominees Pty Ltd (Sixth Defendant)

COUNSEL : S Golledge (Plaintiffs/Applicants) C Branson QC (Sixth Defendant/Respondent)

SOLICITORS : Rockliffs Solicitors & IP Lawyers (Plaintiffs/Applicants) Bamford Lawyers (Sixth Defendant/Respondent)

• 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2670 of 2006 ANTHONY MAGAFAS & ANOR v PETER CARANTINOS & ORS JUDGMENT 1 The first plaintiff, Anthony Magafas, and the second plaintiff, Pac-Com Pty Limited, bring this application by way of Notice of Motion filed on 9 October 2009 for an order that the sixth defendant, PCM Nominees Pty Ltd (PCM), provide security for costs for the hearing of the taking of accounts on 9, 10 and 11 November 2009 before Macready AsJ. 2 There has been lengthy litigation between the plaintiffs and the first to fifth defendants - Anthony Magafas & Anor v Peter Carantinos & Ors [2007] NSWSC 416. The plaintiffs/applicants alleged that large amounts of money were paid to the first defendant, Peter Carantinos, for the purposes of a joint venture to develop certain properties. The first defendant denied that he owed a fiduciary duty to the plaintiffs and asserted that he received those large amounts of money for management fees and/or for services rendered. 3 The Trial Judge, Einstein J, made orders on 30 August 2007 which included the following:

1. That the partnership or joint venture between the first plaintiff and the first defendant was formed in April 1995 and terminated on 1 May 2006 ("the partnership").

2. That upon the termination of the partnership, the first plaintiff is entitled to be repaid his financial contributions to the partnership with interest from the date of contribution to the date of repayment at 8% per annum capitalised and that the remaining assets of the partnership are to be divided equally between the first plaintiff and the first defendant.

6. That the first defendant: (a) is liable to account to the second plaintiff in relation to the proceeds of sale and all profits arising from the sale of the property known as 39 and 41 Riverside Crescent, Dulwich Hill; (b) is liable to account to the second plaintiff in relation to the proceeds of sale and all profits arising from the sale by Artesian Pty Limited of the property known as the Hoechst site at 60-82 Princes Highway, St Peters, and the second plaintiff's beneficial interest as a shareholder in Artesian Pty Limited; (c) is liable to account to the first plaintiff in relation to the financial contributions made to the partnership referred to in the declaration made in paragraph 3 hereof; and (d) is liable to account to the second plaintiff in relation to the proceeds of sale and all profits arising from the sale of the property known as Felton Woods Manor at 88 Lurine Street, Katoomba.

7. That the first defendant is liable to account to the first plaintiff in relation to the proceeds of sale and all profits arising from the sale of the property known as 43 Riverside Crescent, Dulwich Hill.

8. That the first defendant provide the first plaintiff with an accounting, verified by affidavit, in relation to all amounts paid and received and all dealings of the partnership and the second plaintiff, with respect to the transactions referred to in the declaration made in paragraphs 6 and 7 hereof, from April 1995 to the date hereof, such accounting to include: (a) specification in chronological order of each payment and receipt, the date and amount thereof, to whom the amount was paid, from whom the amount was received and the purpose for which the amount was paid or received as the case may be; (b) the assets and liabilities of the partnership as at 1 May 2006; (c) the assets and liabilities of the second plaintiff as at 30 June 2007; and (d) the respective interests of the first plaintiff and the first defendant in the partnership and the respective interests of the first plaintiff and the first defendant in the second plaintiff as at 30 June 2007.

9. That the first defendant pay (a) to the first plaintiff all sums found to be due to him upon the taking of accounts; (a) (sic) to the second plaintiff all sums found to be due to it upon the taking of accounts.

That the first defendant file and serve his accounts and verifying affidavits, on or before 28 September 2007.

That the plaintiffs provide the first defendant with notice of surcharges and falsifications, in accordance with Rule 46.7 of the Uniform Civil Procedure Rules 2005, on or before 29 October 2007.

That the plaintiffs file and serve any further affidavits together with a list of earlier affidavits to be relied upon by the plaintiffs on or before a date to be agreed upon between the parties or determined by the Court.

That the first defendant file and serve any affidavits in reply together with a list of earlier affidavits to be relied upon by the first defendant, on a date to be agreed upon between the parties or determined by the Court.

That the plaintiffs have leave to approach an Associate Judge on a date to be agreed upon by the parties or determined by the Court, for placement of the proceedings in the next Associate Judge's call over list. 4 Certain assets were realised and the proceeds of the sale of those assets are presently in the plaintiffs' solicitor's trust account (the Fund). 5 Although an extension of time had to be obtained the first defendant filed the accounts referred to in his Honour's orders made on 30 August 2007. That took the form of an affidavit by Mr Carantinos sworn 28 September 2007 annexing the various documents purporting to be the accounts. 6 The plaintiffs filed only falsifications in response. Mr Carantinos was made bankrupt in December 2008 on the petition of the first plaintiff. The Trustee in Bankruptcy, Mr McDonald, thereafter had the carriage of the matter. 7 In May 2009 Macready AsJ set the matter down for hearing on the November dates referred to earlier. The matter was before his Honour on 23 September 2009, presumably for pre-hearing directions. Mr McDonald appeared on that occasion and advised the Court that he would not be participating in the proceedings after that date because he had been able to conclude a sale of the interests of the Carantinos estate as of the previous day. 8 On questioning from his Honour Mr McDonald advised that whatever rights Mr Carantinos had in the proceedings had been assigned to interests associated with Mr Munro, who was the solicitor acting for Mr Carantinos in the past. Mr McDonald advised his Honour that the consideration for the agreement, the assignment and the action assigned, had all been identified and in the following week they were establishing and signing the deed, especially "the special purpose vehicle that will take this on". Mr McDonald advised that he would effectively "bow out" from the proceedings. 9 Mr Munro was in Court before his Honour and was invited to move forward to the Bar Table. His Honour asked Mr Munro whether he was involved in the purchase of the bankrupt's estate, to which he responded in the affirmative. He indicated that, "We are happy to put the evidence in respect of the falsifications by 9 October". It was on 1 October 2009 that Mr McDonald, the Trustee as assignor, entered into a deed with PCM as assignee and the third party, Munro Lawyers Pty Ltd. 10 By that deed Mr McDonald assigned all the rights and obligations in the taking of accounts before Macready AsJ, and any order for a certified amount, to PCM. The "Consideration" was defined as 50 per cent of the Net Certified Amount. The "Net Certified Amount" was defined as an amount in excess of a hundred thousand dollars of the difference between the Certified Amount and the Assignee's Legal Costs. The "Certified Amount" was defined as any amount certified on the taking of account to be due to the first defendant on determination of the Proceedings or any amount received by the Assignee in consequence of a settlement entered into in respect of the Accounting or the Proceedings. 11 It is accepted that PCM is a two-dollar company and has no assets other than in what might be seen as the rights under the deed. Mr Branson QC, who appears for PCM today, has not argued the threshold point that PCM would not be in a position to pay a costs order if ordered to do so. 12 The applicants move for the order for security pursuant to the inherent jurisdiction of the Court: Rajski & Anor v Computer Manufacture & Design Pty Ltd & Ors [1982] 2 NSWLR 443 at 447; Idoport Pty Ltd v National Australia Bank Limited [35] [2001] NSWSC 744 at 17. The applicant also moves under Pt 42.21 of the Uniform Civil Procedure Rules 2005 (NSW) (the Rules) and s 1335 of the Corporations Act 2001 (Cth) (Corporations Act). 13 Mr Branson accepted that the exercise of any discretion to order costs is unfettered and should be exercised having regard to all the circumstances of the case. He submitted with emphasis that security will only ordinarily be ordered against a party who is in substance a plaintiff and an order ought not be made against parties who are defending themselves and thus forced to litigate. 14 The Rules relating to accounts are found in Pt 46. In particular Pt 46 r 46.6 and r 46.7 provide as follows:

[r 46.6] Account: filing and service (cf SCR Part 48, rule 5)

46.6 Unless the court otherwise orders, an accounting party must file his or her account and verifying affidavit.

[r 46.7] Account: notice of charge or error (cf SCR Part 48, rule 6)

46.7 (1) If a party seeks to charge an accounting party with an amount beyond that in respect of which the accounting party by his or her account admits receipt, he or she must give to the accounting party notice of the charge, stating, so far as he or she is able, the amount that he or she seeks to charge, with brief particulars.

(2) If a party alleges that any item in the account of an accounting party is erroneous in amount or otherwise, he or she must give to the accounting party notice of the allegation, stating the grounds for alleging the error. 15 In particular the following note is included in Ritchie's at 46.7.5:

[46.7.5] Surcharge and falsification The practice is to call the charge referred to in r 46.7(1) a surcharge and that referred to in r 46.7(2) a falsification. Both surcharges and falsifications may be based on matters of fact or law. Surcharges are usually dealt with first. The onus is on the surcharging party who begins. With falsifications, the onus is on the accounting party who accordingly begins: Pit v Cholmondeley (1754) 2 Ves Sen 565; 28 ER 360. See also Gray v BNY Trust Company of Australia Ltd [2009] NSWSC 789 at [14-15] 16 As can be seen from the above, if a non-accounting party files a surcharge then that non-accounting party has the onus and begins the application. If a non-accounting party files surcharges and falsifications the onus remains with the non-accounting party to begin. If a non-accounting party files only falsifications then the onus remains with the accounting party to prove and thus to begin. 17 Einstein J's orders are in a chronological form that suggests that it is up to the first defendant, now PCM, to prove in the accounting process as the moving party, with the plaintiffs filing the falsifications in response and then PCM having the entitlement to file a reply. 18 All of this relates to the applicants' quest to establish that the true moving party in the accounting exercise is PCM and that it can be characterised as the true plaintiff in the proceedings, or alternatively, as another plaintiff in the proceedings. 19 In this regard the applicants relied upon Willey v Synan (1935) 54 CLR 175 per Dixon J, as his Honour then was, at 184 and Latham CJ at 180; Tomlinson v Land & Finance Corporation Ltd (1884) 14 QBD 539, in particular per Brett MR at 541 and Bowen LJ at 542. 20 Mr Branson submitted that the circumstances in the present case are distinguishable from both Willey and Tomlinson. In particular Mr Branson submitted that the interpleader action referred to in Tomlinson is really a hybrid of the rules where parties can ventilate competing claims, and should not be compared to the present circumstances where these parties were truly in very serious and long fought litigation as plaintiff and defendant. He submitted that this is a partnership dispute of a very ordinary kind, or a joint venture dispute of a very ordinary kind. 21 Whilst Mr Branson made his submissions to resist the submissions of Mr Golledge who appears for the plaintiffs/applicants, in respect of the true identity of the moving party, he accepted unreservedly the Court's inherent powers to make an order should it regard it as consistent with the dictates of justice. 22 Accordingly, it is not necessary for me to decide the matter of who the moving party is but I should say that it does seem probable that in this particular instance the company, PCM, is the moving party in the accounting process and could reasonably be described as akin to a plaintiff, consistently with the authorities referred to above. 23 As I have said, it is not disputed that PCM would not be able to meet any costs order made against it arising out of its participation in the accounting hearing. Mr Golledge submitted that this factor provides the jurisdictional basis for an order under the Rules and the Corporations Act and he submitted it is also relevant to the exercise of the discretion if the Court exercises its inherent power. 24 Mr Golledge submitted that the whole of the litigation history should be taken into account. It is not possible in an application such as this to recount the whole of the history between these parties. I should say, however, that Mr Branson has captured much of it in the very succinct and economical submission in writing. Put shortly, the parties had a reasonably lengthy trial before Einstein J; the defendants appealed to the Court of Appeal and then sought special leave to appeal to the High Court. The appeals were unsuccessful. 25 Mr Golledge emphasised the breaches of a long standing kind that had been found against Mr Carantinos the effects of which, he submitted, were to deprive his clients, the applicants, of substantial amounts of money for a very long period of time. He submitted that the disadvantage to the applicants had been exacerbated by the series of expensive and unsuccessful appeals. 26 The next submission put by Mr Golledge in respect of the exercise of my discretion was the inference to be drawn from the assignment by a company in the circumstances of PCM, five weeks before the hearing date and ten months after the bankruptcy of the first defendant. There is no evidence as to the reason for that assignment to such a company. Mr Golledge submits that the irresistible conclusion is that it was done to avoid paying any costs that may be ordered against such a company, or put more brutally, to deprive the applicants of the fruits of a favourable costs order. Mr Golledge submitted that it was curious that the creditors, including Mr Munro, did not take the assignment but rather this two-dollar company. 27 Mr Golledge also submitted that an application made by PCM to Macready AsJ to defer the hearing, which was rejected, may well have been part of an overall strategy designed to enable PCM to put further economic pressure on the applicants. I reject that submission. There is not enough evidence for me to be satisfied to the requisite standard that such a strategy existed. I can understand the applicants perhaps feeling that way and instructing their counsel in that regard but in my view it is an unjustified submission on the evidence before me today. 28 The final submission in relation to the exercise of my discretion was a submission that the claim by PCM in the accounting proceedings is a weak one. Mr Golledge took me to two items in particular in the filed accounts, a figure of $45,301.60 and a figure of $17,002.78 which were described as "various" and "overheads/expenses". 29 In this regard Mr Golledge relied upon paragraph [67] of Einstein J's judgment to demonstrate that such a claim is hopeless. He submitted that the other similar claims in the accounts would satisfy the same description. That, of course, is a matter for Macready AsJ but, prima facie, it appears that Mr Golledge's submission has force. Mr Carantinos claimed, that he and his interests are entitled to 61 per cent of the Fund leaving but 39 per cent for the plaintiffs. That, as I say, is a matter for Macready AsJ but I do accept that there may well be some difficulty for PCM to achieve the 61 per cent as claimed in the accounts. 30 This application needs also to be looked at in the light of the provisions of the Civil Procedure Act 2005 (NSW) (the Act), in particular sections 56-61. I am not suggesting that this application is part of case management, but rather that the lateness of this application is to be viewed in the light of the way in which this Court now administers case management, consistently with the overriding purpose of the Act and the Rules for the just, quick and cheap resolution of the real issues between the parties. I do not know why the particular corporate vehicle was utilised for the assignment. I am satisfied the irresistible inference is, as Mr Golledge has put it, that it protected others from having to pay the costs and from having to "step up to the plate", to use the vernacular, and take the assignment. 31 The matters to which Mr Golledge has referred persuade me that I should exercise my discretion in the applicant's favour to order security for costs. There are alternative ways of meeting such an order. One is to provide a bank guarantee, another is to pay cash into court. I should note that there was an open offer made by the applicants that they would accept an undertaking from Mr Kevin Munro, Solicitor of this Court, that he would meet the costs of the accounting proceedings up to a maximum of $68,000. 32 Now that I have indicated that I intend to make an order, I will let the parties decide what mechanism is to be utilised, and they can prepare some short minutes of order. If there is a dispute about that aspect, of course I will hear further argument. 33 I should say that the amount of $68,000 has been quantified by Stephen John Rockliff, Solicitor, in his affidavit of 12 October 2009. There has been no challenge to that amount and it seems, in the circumstances, reasonable, having regard to the stage that these proceedings have reached. 34 By consent I make the orders in the short minutes of order initialled by me and dated today. That lists the matter before the Registrar on 30 October 2009 and it confirms the hearing date before Macready AsJ on 9, 10 and 11 November 2009.

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.