Auzhair Supplies Pty Ltd (In Liq) v Gerace

Judgment 1MEAGHER JA: By its amended summons the plaintiff seeks an order under s 74K(1) to extend the operation of a caveat lodged under s 74F of the Real Property Act 1900 (NSW) in relation to the defendants' property at Leppington. It also seeks orders that the judgment and orders of this Court in Gerace v Auzhair Supplies Pty Ltd [2014] NSWCA 181 be stayed pending the hearing of an application for special leave to appeal to the High Court. 2As argued, the plaintiff's primary application was to extend the operation of its caveat. I have power to deal with that application under s 31(3) of the Supreme Court Act 1970 (NSW). 3The nature of the interest claimed by the plaintiff is described in caveat AH998383H as follows: "Equitable interest as Chargee pursuant to undertaking dated 24 July 2013 securing payment of the amount of $875,000 by Rocco Gerace, Ilario Gerace and Domenico Gerace". 4As will become apparent, the question between the parties is whether the plaintiff has an arguable case as to there being any amount secured by its equitable charge over the defendants' interests in the Leppington property. That interest as chargee arose in the following circumstances. 5The plaintiff brought proceedings against its former directors, the first, second and third defendants, for breaches of their equitable duties. That claim was upheld by Brereton J: In the Matter of Auzhair Supplies Pty Ltd (In Liq) [2013] NSWSC 1. The orders giving effect to that judgment were made in January 2013. The director defendants were held liable for an amount of approximately $875,000, including interest and costs. They appealed from that judgment to this Court. At the same time they sought a stay of execution. On 11 April 2013 the primary judge made orders providing for a stay if those defendants executed a charge over their assets as security for the judgment and filed an affidavit disclosing their assets and liabilities. Neither of those conditions was complied with. 6In early June 2013 the plaintiff commenced bankruptcy proceedings against the director defendants in the Federal Circuit Court. On 21 June 2013 the four defendants contracted to sell the Leppington property for $3,140,000. Completion of that sale was conditional upon a rezoning of that land. By letter dated 24 July 2013 the plaintiff offered to adjourn the hearing of its creditor's petition if the first to third defendants provided a form of irrevocable undertaking. The letter described the undertaking sought as follows: "The enclosed undertaking provides for your clients to undertake to pay upon settlement of the Leppington Property on 24 September 2013 the amount of $875,000 into the Supreme Court of New South Wales, being the judgment amount, interest up to the date of the Appeal hearing (14 November 2013) and part payment towards our client's costs (which we note are yet to be assessed) and to agree to charge the Leppington Property with that debt". 7The director defendants accepted that proposal and on 24 July 2013 executed and delivered an irrevocable undertaking in the following terms: "We ... undertake to pay upon settlement of the Leppington Property on 24 September 2013 the amount of $875,000 into the Supreme Court of New South Wales, to secure payment or part payment towards any amounts owing to Auzhair Supplies Pty Ltd (in liquidation) by Rocco Gerace, Domenico Gerace and/or Ilario Gerace and we agree to charge the Leppington Property with that debt". 8The equitable duties alleged to have been breached by the director defendants were the same as those arising under ss 180 to 183 of the Corporations Act 2001 (Cth). If the plaintiff had brought proceedings for compensation in respect of contraventions of those duties, its claim would have been subject to a six year limitation period. The principal issue in the proceedings was whether the defendants could rely upon the application by analogy of that limitation period in answer to the purely equitable claims brought against them. The primary judge held they could not. This Court held that they could and allowed the appeal. 9On 16 June 2014, following the judgment of this Court, the defendants requested that the caveat be withdrawn. By their letter in response dated 4 August 2014, the plaintiff's solicitors noted that an application for special leave to appeal had been filed on 3 July 2014. Describing the circumstances in which the irrevocable undertaking was given, that letter continued: "Given that your clients did not have the financial means to pay the security into the Supreme Court of New South Wales, your clients proposed that instead a caveat over their property at Leppington be lodged ... Part of the reason your clients proposed this course was to allow time for gazettal to occur, which would then facilitate completion of the exchanged contract for the sale of the property dated 21 June 2013 for a price of $3,140,000. We understand from recent communications received from you that gazettal has not yet occurred". 10On 14 August 2014 a lapsing notice under s 74J(1) was served upon the plaintiff caveator. On 2 September, it applied under s 74K(1) to extend the operation of the caveat until the determination of the proceedings in the High Court. On that day Lindsay J ordered that the operation of the caveat be extended up to and including 8 September 2014. He also ordered, pursuant to Uniform Civil Procedure Rules, r 1.21(1)(b) that those proceedings be removed into this Court. His Honour did so on the basis that he considered the central question arising in the proceedings to be whether there should be a "stay" of the effect of the judgment of this Court pending the determination of the application for special leave and, if leave was granted, the determination of the appeal to the High Court. 11Section 74K(1) provides that the Supreme Court may "if satisfied that the caveator's claim has or may have substance" make an order extending the operation of the caveat. The plaintiff's case is that it has the benefit of an equitable charge over the interests of the first to third defendants in the Leppington property as security for payment of the amount owing by the defendants for breaches of their equitable duties as directors. Those defendants accept that they agreed to charge their interests as security for their liability as found by the primary judge. They submit, however, that the effect of the appeal judgment is that there is no amount owing and secured by the charge. That is correct if one only has regard to the judgment of this Court. However, there also is an application for special leave and it is accepted that there is a reasonably arguable case for the grant of leave. In the circumstances there remains a live issue between the parties as to whether there is an amount owing which is secured by the charge. The argument in favour of the existence of the disputed liability is that accepted and explained by the primary judge. I am satisfied that the caveator's claim to an equitable charge securing such a debt is reasonably arguable and has substance. 12This makes it necessary to consider whether the power to extend the operation of the caveat should be exercised. The following matters are relevant. First, the likelihood is that if the operation of the caveat is not extended the Leppington property will be sold and the proceeds of sale dissipated. Secondly, it is not likely, in that event, that the director defendants would otherwise be able to pay an amount equal to the value of the plaintiff's secured interest in the property. Each of these matters is a factor to be weighed in favour of the extension of the operation of the caveat. 13If the sale of the property were to proceed, after the discharge of liabilities having priority to the charged liability and the payment of the costs of the transaction, the evidence indicates that there will remain an amount of approximately $600,000 available as security for the disputed liability. As a condition of the extension of the caveat, the plaintiff has offered to undertake to withdraw the caveat on completion of the existing contract for sale if there is paid into the Supreme Court as security the balance of the proceeds available after discharge of the liabilities having priority and costs, and also to consent to the release of that amount plus any interest in the event that the application for special leave or any appeal is unsuccessful. 14If that is the position, the defendants do not point to any other prejudice likely to result to them from the extension of the caveat. They submit, nevertheless, that the caveator should be required to give an undertaking as to damages as a condition of any extension order. In response, the plaintiff proffers such an undertaking, although it accepts that such an undertaking is of little or no value because the plaintiff has no assets. It points out, however, that its financial position is due primarily to the conduct of the director defendants. For that reason it submits that an undertaking as to damages should not be required. 15In circumstances where it is not obvious that the defendants will suffer any significant damage as a result of the extension of the caveat on the terms proposed and the plaintiff's parlous financial position is due, at least to some extent, to the director defendants' breaches of duty, the present is not a case in which an undertaking as to damages should be required. An additional factor which I take into account is that no such undertaking was required of the plaintiff in return for the agreement to charge the property and the promise to pay the proceeds of sale into Court. I accept, however, that such an undertaking may have been sought had moneys been paid into Court and an application made for their payment out after the judgment of this Court. For that reason I have not given this last factor much weight. 16This conclusion makes it unnecessary to consider the alternative relief sought in the amended summons staying the judgment of this Court. That relief was not the subject of any argument and it was not obvious how it might assist the plaintiff in circumstances where the judgment of the primary judge has been set aside. It is sufficient that the following orders be made: (1)Upon the plaintiff by its counsel giving an undertaking to the Court in the terms of paragraphs (2) and (3) of the Short Minutes of Order dated 9 September 2014 initialled and placed with the papers, order that the operation of caveat number AH998383H lodged in relation to the land contained in Certificate of Title, Folio Identifier 103/1175246 be extended until the plaintiff's application for special leave to appeal to the High Court of Australia in proceedings S144 of 2014 is heard and determined and, in the event that special leave to appeal is granted, until the appeal proceedings in the High Court of Australia are heard and finally determined. (2)Order that the costs of this application be costs in these proceedings. (3)Order that these proceedings be remitted to the Equity Division of the Court.