Aussie Airlines Pty Limited v Australian Airlines Ltd

The power to order declaratory relief

1. Mr Krochmalik refers to the Court's power to make declaratory orders under s 75 of the Supreme Court Act 1970 (NSW) and in its inherent jurisdiction and refers to the case law setting out the circumstances in which declarations may properly be made, including Aussie Airlines Pty Limited v Australian Airlines Ltd (1996) 68 FCR 406 and McCausland v Surfing Hardware International Holdings Pty Limited (No 2) [2014] NSWSC 163. In the latter case, Slattery J referred to the utility of the Court's discretion to grant declaratory relief, including in circumstances where no consequential relief will be ordered, and also referred to several categories where the Court will decline to grant such relief, and noted that those matters establish a consistent and principled approach to the exercise of the discretion whether to grant that relief. The circumstances in which the Court may not grant declaratory relief include the position where an issue is purely theoretical and where no good purpose would be served by granting declaratory relief. This matter is plainly not purely theoretical, so far as it concerns the validity of the administrators' appointment and a real dispute as to the construction of the engagement letter on which that appointment was based, and a useful purpose is likely to be served by granting declaratory relief where there is a potential for further controversy between the Plaintiffs and AFS as to the scope of that engagement letter. A third situation in which a declaration may not be granted is where it would be anterior to a suit for future relief and that future relief is not sought in the same proceedings: Neeta (Epping) Pty Limited v Phillips [1994] HCA 18; (1974) 131 CLR 286 at 307. That situation does not arise in this case, since the declaration sought by the companies would finally determine the position as between the companies and AFS, so far as it would establish that AFS had no entitlement to assert a right of security as against the companies.
2. Mr Krochmalik also pointed out, and I accept, that a declaration would ordinarily only be made where there is a contradicting party, but that does not require that the contradicting party actually oppose the making of the declaration: Re Idylic Solutions Pty Limited; Australian Securities and Investments Commission v Hobbs [2013] NSWSC 106; (2013) 93 ACSR 421 at [31]. In this case, AFS is plainly a contradicting party to the Plaintiffs' claims although it has not pressed its opposition to those claims. Mr Krochmalik also pointed out, and I accept, that there may be circumstances in which a declaration may properly be made where proceedings have settled, to record the basis of the resolution of the proceedings, where that resolution has occurred by settlement rather than by judgment following a contested hearing: Cruse v Multiplex Ltd [2008] FCAFC 179; (2008) 172 FCR 279.

The terms of the engagement letter

1. It is convenient, in this case, in determining whether the Court may properly make the declarations sought, to approach them in the opposite order to that which they would be set out in the short minutes of order that are proposed. The second declaration sought is a declaration as to the terms of the engagement letter, to the effect that the parties to that engagement letter are AFS and Mr Zeitouneh; none of the companies is a party to that engagement letter; and no charge or security interest was granted by any of the companies, in favour of AFS, pursuant to the engagement letter. As I noted above, Gleeson JA accepted that the companies had a prima facie case in respect of those matters, in granting interlocutory relief, although the Court must now be satisfied of that case on the balance of probabilities in order to make the declarations sought on a final basis.
2. Mr Krochmalik, in written submissions, points to a number of factors which support the declarations sought by the Plaintiffs. The first, so far as the parties to the agreement are concerned, is that the addressee of the engagement letter is Mr Zeitouneh and not the companies, and that the engagement letter is signed by Mr Zeitouneh, there referred to as the client, and not by the companies, and there is no reference to other clients or to the companies in the execution block in that letter. The terms of the engagement letter also appear to be consistent with a construction that the letter is an agreement between AFS and Mr Zeitouneh, so far as there is express reference to "You", in a manner that appears to be consistent with a reference to Mr Zeitouneh, and there is, on page 3, a provision for a guarantee, apparently by Mr Zeitouneh, of professional fees due in respect of the provision of services to other persons, companies, trusts, and other entities. As Gleeson JA noted in his interlocutory judgment, it seems at least possible that a reference to the various entities, which is in fact found on page 3 of the engagement letter, by way of a list of those entities, should in fact appear on page 4 of the letter beneath that reference to a guarantee. I recognise that there is, in the engagement letter, a provision which applies if the client is a company, but it is plain that that provision addresses the possibility of a corporate client, and takes the matter no further in establishing that the companies as well as Mr Zeitouneh are party to the engagement letter.
3. I am satisfied, as a matter of construction, that the parties to the engagement letter are Mr Zeitouneh and AFS, and not the companies, and that supports the first and second parts of the declarations sought. As Mr Krochmalik points out, that question is to be determined objectively, at least in the first instance, although he also points out that the Court may have regard to subsequent conduct in determining whether a contract exists. In the present case, so far as the question for the Court is to determine whether a contract exists with the companies, or only with Mr Zeitouneh, subsequent conduct is consistent with the latter possibility, so far as Mr Zeitouneh rather than the companies were invoiced for the services in 2014, by the invoices that it appears are in dispute.
4. The next question is whether a charge or security interest was granted by the companies in favour of AFS, pursuant to the engagement letter. I referred above to a clause which provides that, if the client is a company, it charges all of its assets and undertaking, both present and future, in favour of AFS to secure the payment of certain matters. That clause, however, applies only where the client is a company and can have no application where, on the findings I have reached, the client is Mr Zeitouneh and not the company. In those circumstances, the structure of the engagement letter is to provide for Mr Zeitouneh personally to guarantee the provision of the services provided to the companies, at least if page 3 is read as extending to the list of companies found on page 4 of the engagement letter, not to provide any direct security by those companies. Those findings are sufficient to support the second declaration sought, in respect of the structure of the engagement letter.

Whether the administrators were validly appointed

1. The first declaration sought relates to the validity of the purported appointment of the administrators on 7 March 2017. The validity of that appointment depends upon the operation of s 436C of the Corporations Act, which relevantly provides that a person who is entitled to enforce a security interest in the whole, or substantially the whole, of a company's property may by writing appoint an administrator of the company, if the security interest has become, and is still, enforceable.
2. The conclusion which I have reached above in respect of the construction of the engagement letter has the consequence that AFS was not a person who was entitled to enforce a security interest in the whole, or substantially the whole, of the companies' property, because the companies had not granted a security interest over their property by the engagement letter. That is sufficient to support the first declaration sought as to the invalidity of the administrators' appointment. Mr Krochmalik also identifies a second basis on which that declaration could be made, so far as the circumstances in which any such charge, if (contrary to the view I have reached) it had been granted by the companies, could be enforced, were limited to the position where action had been commenced by any party to make a company an externally administrated body corporate.
3. Mr Krochmalik submits that clause is directed to the situation where a third party had taken such action, and it seems to me that submission is plainly correct. In particular, it cannot be the case that that clause permits the enforcement of the security, if (contrary to the view I had reached) it had been granted by the companies, where AFS takes action to appoint an external administrator, without AFS first having an entitlement to appoint such an administrator. To put that proposition another way, it is inconceivable that the clause could be construed such that, when AFS took action to appoint an external administrator which it had no prior entitlement to take, the fact that it had done so would then become a basis for that appointment. That analysis provides a second basis for the declaration which is sought as to the invalidity of the administrators' appointment, so far as it has the consequence that if, contrary to the view I have reached, the companies had granted security, that security was not then enforceable by AFS.
4. In these circumstances, the factual and legal basis for the declaration sought is established. It is implicit in what I have said above that it is also appropriate to make the declarations, for two reasons to which Mr Krochmalik refers. The first is that the declaration will clarify the position, as between the companies on the one hand and the administrator on the other, and that is desirable for the companies so far as the question whether they were or were not validly placed in administration may be relevant to their dealings with future creditors. As between AFS and the Plaintiffs, the declarations are also appropriate to quell the relevant controversy, against the contingency that, notwithstanding the settlement in these proceedings, a future occasion might arise on which AFS was to contend, contrary to the basis of that settlement, that it was entitled to a security interest over the companies' assets and was, for example, entitled to take some other step such as the appointment of receivers in respect of such a security interest. In order to resolve the dispute between the parties, a declaration is desirable in order to avoid such a future controversy.
5. For these reasons, I am satisfied that I can make the declaration sought in paragraph 1 of the short minutes of order.

Other notes and orders

1. A note is sought, by consent of the parties, recognising that the making of those declarations does not prejudice any contractual claim or right of AFS to pursue recovery against any of the companies or Mr Zeitouneh of any debt which is alleged to be owed to it, other than to the extent of any consistency with the declaration. I can make that note, where the parties ask me to do so, and it will be a question for any future court dealing with any such application to determine the extent to which any claim or debt, for example as against the companies, would be inconsistent with the declarations that have been made.
2. An order is sought, and not opposed by the administrators, that they sign all documents and do all things that are reasonably necessary to update the register maintained by ASIC to record the effect of the declaration. The steps that they take may, of course, be constrained by ASIC's policies as to what it does and does not record upon that register, but that is appropriately recognised by the fact that they are only required to do such things as are reasonably necessary to achieve that result.
3. As I noted above, orders are sought, by consent, that will restrain AFS from taking certain steps and that will deal with the question of costs and the administrators' lack of any entitlement to indemnity or reimbursement of costs, disbursements or remuneration. Mr Krochmalik made clear, in the course of submissions, that order 5 dealing with the costs payable by AFS, in respect of the costs of the First to Fifth Plaintiffs, extends only up to and including 24 April 2017. These orders are properly made by consent, and the Court need not further address them, notwithstanding that they are consistent with the substantive resolution of the proceedings.

Orders made

1. For these reasons I make orders in accordance with paragraphs 1 and 3 to 7 in the form of the short minutes initialled by me and placed in the file, and I note paragraph 2 of those short minutes.

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: 22 June 2017