Solicitors:
Gibsons Lawyers (third plaintiff)
Marsdens Law Group (first and second)
File Number(s): 2012/169096
[2]
Judgment (ex tempore)
HIS HONOUR: In the substantive proceedings which were commenced in or about May 2012, the third plaintiff Aquatic Air Pty Ltd contends that a security agreement and associated documentation entered into between it, the first defendant Dieter Siewert, the second defendant, Lieselotte Siewert, the third defendant Herron Airlines Travel Pty Ltd, the fourth defendant Wingaway Air Pty Ltd and the fifth defendant AT Air Group Pty Ltd on or about 25 November 2011, securing the balance purchase price due to the Siewerts as vendors by AT Air Group as purchaser under a share sale agreement dated 22 July 2011, was procured by alleged misrepresentations said to have been made by or on behalf of the defendants and claims orders setting aside the security documentation. That security documentation includes a call option which the Siewerts purported to exercise in February 2012 pursuant to which they were entitled to acquire a property which was also the subject of the security agreement, at 2/13B Pearl Bay Avenue, Mosman.
On 25 June 2012, following interlocutory proceedings between the parties, a consensual interlocutory regime was established by orders of that date, relevantly as follows:
1. Caveat No AG914346 is extended until further order.
2. The Defendants are restrained from Transferring the property known as known as 2/13B Pearl Bay Avenue Mosman being Lot 2 in Strata Plan 55795 ( the property), where transfer means the acts set out in order 1(a) and (b) made on 30 May 2012.
Undertakings by the Plaintiffs:
1. The usual undertaking as to damages.
2. The Plaintiffs undertake to pay all outgoings and not default on any liability which would cause a breach of any agreement in relation to the Property including but not limited to the National Australia Bank mortgage, payment of Council rates, water rates, strata fees, any such payments made being without prejudice to any rights the Plaintiffs may-have against the First and Second Defendants and as an interim measure only.
3. The Plaintiffs by their solicitors will upon request from Defendants solicitors provide any and all information relating to the liabilities in order 4 above including confirmation that payment has been made.
4. The Plaintiffs undertake not to transfer or deal with the property including entry into any Residential Tenancy Agreement or use it or allow the Property to be used as security and will not in encumber or draw on any present encumbrance or security in relation to the Property in any way.
5. Aquatic Air undertake to remain in possession of the Property and keep it in good maintenance and repair.
There were other undertakings and provisions, but they are not relevant for present purposes. Orders 1(a) and 1(b) of 30 May 2012 referred to in paragraph 2 of the above order were in the following terms:
1. Upon the plaintiffs, by their counsel, giving the usual undertaking as to damages: 1. Until 5pm, 20 June 2012, the first and second defendants be restrained from:
1. exercising any rights consequent upon the service on the third defendant of the notice of exercise of option signed by the first and second defendants and dated 21 February 2012;
2. transferring, encumbering or creating any interest in the land known as 2/13B Pearl Bay Avenue, Mosman, being all that land in folio identifier 2/SP 55795.
The reference in order 1(a) to the notice of exercise of option dated 21 February 2012 was to the exercise of the call option to which I have referred.
At the time those orders were made and undertakings given, there were four plaintiffs in the proceedings, including Mr Seller personally, who was the second plaintiff. Although the plaintiffs other than Aquatic have since been removed from the proceedings and the proceedings are continued only by Aquatic, it follows that Mr Seller was one of the plaintiffs referred to in the orders of 25 June 2012 and one of those who gave the undertaking in question. His removal as a plaintiff in the proceedings did not release him from that undertaking.
The substantive proceedings are set down for final hearing for eight days commencing on 10 February 2015.
Until early 2014, in conformity with the undertaking contained in paragraph 4 of the order of 25 June 2012, Aquatic appears to have paid all outgoings and not defaulted on any liability of the type described in that undertaking. However, on 14 April 2014, the National Australia Bank, which is the first mortgagee of the Pearl Bay Avenue property issued and served on the plaintiff a notice of default pursuant to (NSW) Real Property Act 1900, s 57(2)(b), identifying a default in respect of $55,157 said to be due and owing to it under its mortgage, and requiring that default to be remedied within 31 days. This default appears to have arisen from the debiting to the loan account on 9 December 2013 of $44,605.42 in respect of moneys paid by the National Australia Bank to the office of State Revenue in respect of land tax for earlier years, which had been the subject of some dispute.
The default was not remedied, as a result of which the total of the moneys secured, then said to amount to about $1,855,157, were claimed by the National Australia Bank to be immediately due and payable. On 25 July 2014, the bank instituted proceedings in the Common Law Division for possession of the property, naming Aquatic as first defendant and Mr Seller as second defendant. The bank has now obtained judgment for possession, and a writ of possession is to be executed on or about 12 January 2015.
On 18 July 2014, Mr and Mrs Siewert filed a motion seeking to have the injunction restraining them from transferring the property discharged so that they would be at liberty to exercise their rights under the security documentation essentially on the ground that the plaintiffs had defaulted in respect of their undertaking upon which the injunction had been granted. By notice of motion filed on 28 July 2014, Aquatic sought that the orders of 25 June 2012 be vacated, save for order 2, and undertaking 3, and directions that they list the property for sale with an agent with a view to an auction sale by the end of October and the payment of the net proceeds after discharge of mortgage to the bank into an interest bearing deposit to be held in trust by their solicitor pending the outcome of the proceedings. They sought that relief essentially to avoid the threatened mortgagee sale, in order to achieve a private sale without the negative impact of a mortgagee sale, and then to preserve the proceeds to be the subject of the proceedings.
For reasons given on 31 July 2014 - essentially, that I considered the default arising from the land tax liability to be of an inadvertent character and that it was in the obvious interests of all parties that a mortgagee sale be avoided, and that only Aquatic had any coherent proposal to achieve that outcome - I dismissed the Siewerts' application and made an order which would permit Aquatic to sell the property: see AT Air Group Pty Limited v Dieter Siewert (No 3) [2014] NSWSC 1129 and AT Air Group Pty Limited v Dieter Siewert (No 4) [2014] NSWSC 1186. The Court of Appeal refused leave to appeal: see Siewert v Aquatic Air Pty Ltd [2014] NSWCA 384.
Although there have been some offers and an attempted auction, no sale of the property has yet been negotiated and, as I have said, the bank now intends to take possession early in January 2015.
On 1 December 2014, the matter was relisted on the application of the Siewerts, who sought a stay of the proceedings on the basis that the plaintiffs were in continuing default in respect of undertaking (4). On that occasion, it emerged that the default related not only to the land tax component, but that Aquatic had ceased to service the outgoings, including mortgage repayments, since about March 2014, a matter which had not been disclosed to the Court on the earlier applications. In those circumstances, the prima facie position was that Aquatic was in default of its undertaking, and unlike the position which appeared to prevail on the earlier applications, that was not attributable only to a relatively inadvertent or unforeseen event concerning the land tax, but to a protracted failure to make payments that Aquatic and the other plaintiffs had undertaken would be made, for which default no sufficient explanation was provided to the Court. I took the view that it was for the plaintiffs to establish, if they could, some reason why they should be relieved from their undertaking. Accordingly, I made orders on that occasion as follows [AT Air Group Pty Ltd v Dieter Siewart (No 5) [2014] NSWSC 1709]:
1. Unless by 15 December 2014, the plaintiffs have remedied their apparent breach of the undertaking contained in paragraph 4 of the orders made on 25 June 2012 by reducing the amount outstanding to the National Australia Bank, secured on the mortgage over 13B Pearl Bay Avenue, Mosman, to $1.8 million, or have by that date been relieved by order of the Court from that undertaking, the proceedings be stayed;
2. The plaintiffs have liberty to apply on 48 hours notice to be relieved from the said undertaking.
Pursuant to the liberty so reserved, on 10 December 2014 Aquatic sought to be released from its undertaking and to have the stay dissolved, arguing that it was unable to service the outgoings due to impecuniosity, but the evidence adduced on the application was entirely inadequate to establish not merely current impecuniosity, but more notably that Aquatic had made all reasonable attempts to perform the undertaking. For that reason, I dismissed that application, but reserved leave to renew it on reasonable notice before 15 December 2014 [AT Air Group Pty Ltd v Dieter Siewert (No 6) [2014] NSWSC 1777]. That time was subsequently extended to 20 December.
Pursuant to that leave, before the Court now is a further oral application by Aquatic, and I infer also by Mr Seller as a former plaintiff bound by the undertaking, to be relieved from the undertaking and to have the stay dissolved.
I take the relevant principles that inform consideration of this application to be the following:
1. First, the grounds on which the Court will relieve a party from an interlocutory undertaking are analogous to, if somewhat stricter than, those on which an interlocutory injunction may be varied. Essentially, that involves a change of circumstances that bears on the justice of continuing the injunction or undertaking.
2. Secondly, the Court may in its discretion refuse to entertain a party who is in default of orders of the Court or an undertaking to the Court.
3. Thirdly, the Court should not stultify proceedings legitimately brought before it by making interlocutory orders, such as orders for security, which cannot be complied with by reason of impecuniosity.
4. Fourthly, the Court will not decline to make such an order against a nominal or corporate party unless the individuals who stand to benefit from the proceedings expose their own assets and thus do not shelter behind the corporate veil.
The evidence establishes that while Aquatic has, since 2011, paid a total of about $330,000 outgoings in respect of the property, it has failed, since early 2014, to pay some further $104,000. As I have said, this includes not only the land tax component of about $45,000, but also other outgoings, most notably, the routine mortgage instalment repayments. The consequences of this failure include erosion of the equity in the property by increasing the amount secured on it from $1.8 million to $1.904 million, and the committing of an event of default which was precisely what the undertaking was not to permit, the bank thereupon instituting proceedings and, it would seem, inevitably, taking possession and exercising its mortgagee's power of sale to the detriment of the parties - in particular, the Siewerts, though it is also probably to Aquatic's detriment.
Meanwhile, Aquatic secured the restraint on the Siewerts exercising their powers under the security documentation, for which detriment to the Siewerts, the undertaking was intended to be an important compensating factor. In that way, the purpose of the undertaking, which was essentially to preserve the property and the equity in it so that if the Siewerts were ultimately to succeed at trial, their position would be preserved, has been defeated.
There is some suggestion, though I make no finding at this stage in this respect, that had the Siewerts been able to exercise their security while they were restrained from doing so, they would have had a purchaser at a price of $2.4 or $2.5 million, when the amount secured on the property to the bank was $1.8 million, meaning that they stood to realise an equity of $600,000 or so. Now, it is doubtful that the property will sell for more than $2 million - although it may - and the amount secured to the bank exceeds $1.9 million. When one adds the bank's costs of its enforcements proceedings and the costs of sale to that amount, it can be anticipated that there will, in the event of a sale at $2 million, be very little equity remaining.
The fundamental injustice in all of this is that the plaintiffs have secured the benefit of the injunction for a period of two years, but have denied the compensating benefit to the Siewerts which was intended to offset the prejudice potentially occasioned by the injunction.
Against that, however, two things should be noted. First, the plaintiffs did perform their obligations under the undertaking for a substantial period - about 18 months - in the course of which they paid in the order of $300,000 in respect of outgoings. Secondly, as the undertaking itself recognises, it is not at all certain that ultimately it would be held that the plaintiffs were liable to pay those outgoings. It was a term of the security documentation that the defendants would pay the outgoings, and undertaking (4) is plainly expressed to be without prejudice to the plaintiff's rights and as an interim measure only. While, on the one hand, it may be that the Siewerts will establish that they would have effected a very prompt and profitable sale of the property if not restrained, on the other, prima facie, the undertaking relieved them from a liability that they would otherwise have had to pay the outgoings during that period. Thus, it is by no means certain that the ultimate outcome would be that the Siewerts were entitled to retain the benefit of the payments made pursuant to undertaking (4).
I accept that there have been significant adverse changes in the plaintiff's financial position since June 2012. This is due, in particular, to the very substantial legal expenses that have been incurred, both in these proceedings and also in complex criminal proceedings in which Mr Seller is a defendant. Between them, it seems likely that Mr Seller has incurred costs in the order of $1.5 million or thereabouts. Also, these proceedings have taken significantly longer to come to trial than would reasonably have been anticipated when the undertaking was given in June 2012. As I have indicated in an earlier judgment, I do not think either party is exclusively responsible for that, and both bear some responsibility for it; but the result is that the burden of the undertaking in financial terms has proved greater than would originally have been anticipated. That the plaintiffs have paid significant amounts on the account of the undertaking in the order of $330,000 - although some of that relates to the seven month period predating the undertaking - illustrates that the obligation has far from been totally disregarded.
As I have mentioned, it seems to me that the default in respect of the land tax component involved a significant element of inadvertence. While it might well have been foreseen that a land tax liability of that order would arise at some point, and while a prudent plaintiff might well have made provision for it, it seems to me that it is, at least, understandable that it was not able to be met when it arose and, in any event, the evidence seemed to establish that notice of its being incurred did not come promptly to Mr Seller's attention and when it did, he at least sought to make some arrangements with the bank in respect of it.
However, the other outgoings - in particular, the regular mortgage instalment payments - fall into a different category. To cease to make those payments without approaching the Court for a release from the undertaking was, to say the least, a somewhat cavalier approach; but while the evidence, even on this third attempt, was less than perfect, and while significant amounts appear to have passed through a number of accounts under the control of Mr Seller, by and large the expenditure of those amounts does not seem attributable to other than reasonable living expenses and his legal expenses.
I am not persuaded that there has been a wilful or flagrant disregard of the undertaking, although it does seem to me that it was not given the priority which an undertaking to the Court ought to have been afforded. I am satisfied that neither Aquatic nor Mr Seller directly or indirectly have liquid resources with which the arrears under the undertaking could be cleared before the hearing, nor probably to service the undertaking even between now and the hearing. It follows that insisting on strict compliance with the undertaking would likely stultify the proceedings.
However, there are persons who stand to benefit from the proceedings who have access, directly or indirectly, to resources which could mitigate the consequences of Aquatic's default. Aquatic holds the Pearl Bay Avenue property as trustee of a discretionary trust called the Aquatic Trust. The beneficiaries of that trust are, imperfectly but essentially, members of Mr Seller's family. In a practical sense, those who stand to benefit from the litigation are primarily Mr Seller and his wife Ms Tankard. The evidence before the Court clearly demonstrates that their financial arrangements are, unsurprisingly, closely intertwined. At times, income of Mr Seller has been applied to servicing the mortgage on their home at Mandemar, which is held in the name of Ms Tankard. At times, Ms Tankard makes available funds to service obligations of Mr Seller.
In those circumstances, consistent with the approach of the Court on applications for security for costs where questions of stultification arise, it seems to me that if those who stand to benefit from the litigation desire that the litigation be permitted to proceed notwithstanding Aquatic's default in respect of the undertaking, the price is that they must make available their own assets to meet the obligation that Aquatic undertook.
For present purposes, that, it seems to me, would sufficiently be satisfied by Mr Seller acknowledging that he is personally liable for any loss ultimately found to have been suffered by the defendants from Aquatic's default in respect of the undertaking, and by that liability being secured by an unregistered second mortgage over the Mandemar property, provided that if a reasonable alternative security is offered, I would give consideration to that.
In addition, where it is now clear that the undertaking which formed an important element of the balance of convenience equation on which the injunction was consented to is no longer to be performed, that balance is significantly shifted, so that it no longer favours continuation of the injunction. Ultimately, the plaintiffs accepted that the injunction should be discharged, because it is likely to be in the interests of all parties that as many as possible are seeking to obtain superior offers for the property. Given the current position of the bank, it is unlikely that the discharge of the injunction will be of much benefit to any party, but if it results in the Siewerts being able to secure a superior offer that is acceptable to the bank, there may well be benefit for all.
Accordingly, it seems to me that the order staying the proceedings made on 1 December should be set aside upon the plaintiffs providing an undertaking to the Court by Mr Seller personally to indemnify the defendants in respect of any loss they may ultimately be found to have suffered by reason of default in respect of undertaking (4), and security for that undertaking by way of a second mortgage over the Mandemar property or such alternative security as may be acceptable to the defendants or to the Court. The injunction should be discharged. As the plaintiffs are effectively seeking a significant indulgence, they must pay the costs of the application.
The Court, therefore, orders that:
1. upon the plaintiffs' filing, by 23 January 2015:
1. a written undertaking by Mr Seller to the Court and to the defendants that he will personally indemnify the defendants in respect of any loss which they are ultimately found by the Court to have suffered by reason of any default in respect of undertaking (4) given on 25 June 2012, and
2. security for that undertaking by way of an unregistered second mortgage over the Mandemar property (or such alternative security as may be acceptable to the defendants or to the Court),
3. the order staying the proceedings made on 1 December 2014 be discharged;
1. the injunction contained in paragraph 2 of the order made on 25 June 2012, be discharged;
2. the plaintiffs pay the defendants' costs of the application;
3. there be liberty to apply in connection with any proposal for alternative security by arrangement with my associate on reasonable notice.
[3]
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Decision last updated: 01 May 2015