Bresam Investments Pty Ltd & Ors v Shmee Pty Ltd & Anor [2008] VSCA 251

Court of Appeal (Vic)|2008-12-05|Before: KELLAM and DODDS-STREETON JJA

PRACTICE AND PROCEDURE - Appeal - Whether stay of execution of judgment below - Whether exceptional circumstances - Impecunious appellants - Disposition of assets to related parties willing to fund litigation and appeal - Prospect of appellants' liquidation or bankruptcy - Whether appeal rendered nugatory.

PRACTICE AND PROCEDURE - Application for security for costs - Appellants impecunious - Related parties to fund appeal - Appropriate quantum.

1 In my view the application by the appellants for a stay of execution of judgment should be refused for the reasons stated by Dodds-Streeton JA. Likewise and for the reasons stated by Dodds-Streeton JA, I agree that the appellants should be required to provide security for costs in the sum of $80,000.

2 There were two related applications before the Court:

(1) An application by summons filed on 17 October 2008 seeking a stay of execution of a judgment until the hearing and disposition of appeal ('the stay application').

(2) An application by summons filed on 10 November 2008 seeking that the appellants give security for the costs of the appeal ('the security for costs application').

On 28 November 2008, the Court dismissed the stay application and ordered that the appellants on or before 24 December 2008 provide $80,000 as security for the respondents' costs of the appeal in a form acceptable to the Prothonotary, failing which the appeal would be stayed. The reasons for those orders are set out below.

3 Both applications arose from the same proceeding, in which a judge of the Trial Division on 8 September 2008 ordered that:

there be judgment in favour of the first named plaintiff, Shmee Pty Ltd ("Shmee") against the defendants, Bresam Investments Pty Ltd ("Bresam") and Melamybek Investments Pty Ltd ("Melamybek"), Dennis James Johnston ("Johnston") and Peter Ronald Whitaker ("Whitaker") in the amount of $2,600,000 together with damages in the nature of interest pursuant to statute in the amount of $825,356.

4 The trial judge ordered that the defendants pay Shmee's costs for the period from the commencement of the proceeding to 23 May 2008 on a party/party basis and from 24 May 2008 until 8 September 2008 on an indemnity basis.

5 His Honour also granted a stay on execution of the judgment for 30 days.

6 By notice of appeal dated 22 September 2008, the defendants below (Bresam, Melamybek, Johnston and Whitaker) ('the appellants') appealed from those orders.

7 By a summons filed 17 October 2008, the appellants sought a stay of the judgment until the hearing and disposition of the appeal.

8 The stay application was opposed by Shmee and INC Corporation Pty Ltd (collectively, 'the respondents').

9 The stay application was supported by the affidavit of Catherine Watt sworn 17 November 2008, the affidavit of Dennis Johnston sworn 27 October 2008, the affidavit of Peter Whitaker sworn 27 October 2008, the affidavit of Alexandra Osborne sworn 27 October 2008 and the affidavit of Frederick Gerardson sworn 18 November 2008.

10 The affidavit of Gerard Gleeson sworn 10 November 2008 was filed in opposition to the application.

11 In the proceeding below, Shmee, the first plaintiff, a wholly-owned subsidiary of INC Corporation Pty Ltd ('INC'), an engineering company controlled by Coates and Simmons and which employed Coates's wife, Ms Mutimer, entered a sale contract dated 29 November 2003 to acquire a company, Insulform Pty Ltd ('Insulform') and its business ('the Insulform business') from its shareholders, Bresam and Melamybek (companies controlled by Messrs Johnston and Whitaker respectively), for $5,500,000 plus stock, equipment and accrued employee leave entitlements.

12 The trial judge found that because INC (which controlled Shmee) was a significant competitor of Insulform in Australia in relation to acoustic and noise control equipment for the automotive industry, a provision in the sale contract relieved the vendors from providing material, sensitive information to the purchasers which would prejudice Insulform's competitiveness if revealed prior to completion of the purchase.

13 The trial judge found that certain critical information was withheld or supplied only progressively in the course of negotiations, creating:

a high degree of dependence upon the information actually supplied by the vendors in making the decision to proceed with the purchase and enter into and complete the sale contract.

The trial judge found that only a limited due diligence was permitted and the purchasers were never in a position independently to verify material costings, potential savings, process capability and the development of potential business arising from new products.

14 The purchasers ultimately paid a total of $6,269,668, comprising the base purchase price of $5,500,000 plus $570,948 for stock at valuation and $418,581 for additional equipment, less $219,861 for employee leave entitlements.

15 In the proceeding below, the respondents alleged that five representations which induced them to enter and complete the sale contract were misleading or deceptive in breach of s 52 of the Trade Practices Act 1974 (Cth) and s 9 of the Fair Trading Act 1999 (Vic).

16 Shmee claimed for loss and damage arising out of the acquisition of the Insulform business, on grounds which may be summarised as follows:

• The appellants significantly misrepresented the future profitability of the Insulform business. Shmee relied on the misrepresentation, which induced it to enter into and complete the sale contract. That claim was pleaded as alleged breaches of contractual warranties under the sale contract and of s 52 of the Trade Practices Act 1974 (Cth) and s 9 of the Fair Trading Act 1999 (Vic), in respect of which both Johnston and Whitaker were allegedly knowingly involved and hence personally liable;

• The amount of the accrued employee entitlements was understated and the acquisition price was thereby inflated by $85,658; and

• Shmee overpaid for stock by $58,390.57 in respect of unsaleable or obsolete stock which should have been excluded from the sale.

17 His Honour accepted that the purchasers overpaid on the purchase price by $2,160,000 for the benefit of unfulfilled promises. The loss and damage caused by the making of the principal representation in breach of s 52 of the Trade Practices Act, s 9 of the Fair Trading Act and the contractual warranties amounted to $2,160,000. Interest was calculated at $825,356.

18 His Honour rejected the appellants' claims for $85,658 in respect of the employee entitlements and for $58,390.57 in respect of the alleged overpayment for stock.

19 By a notice of appeal dated 22 September 2008, the appellants appeal from the decision below.

64.25 Except so far as the Court of Appeal or a Judge otherwise orders -

(a) an appeal shall not operate as a stay of execution or of proceedings under the decision appealed from;

(b) no intermediate act or step shall be invalidated.

21 The respondents, by a notice of cross appeal, also appeal from aspects of his Honour's findings.

22 The principles relevant to the grant of a stay are well established and were recently set out in Maher & Anor v Commonwealth Bank of Australia & Anor as follows:[1]

In Rowan v Australian Associated Motor Insurers Ltd (Unreported, Supreme Court of Victoria, Full Court, Fullagar and Marks JJ, 16 December 1988), Fullagar J (with whom Marks J concurred) stated:

I do not think that this court should or even could lay down in advance what does or does not constitute special circumstances, and I think that the scope of the rule is of the character indicated by Rich J in King v Commercial Bank of Aust [1920] HCA 62; (1920) 28 CLR 289 at 292, where his Honour said of s 35 of the High Court Procedure Act, "No rules can be formulated in advance by any judge as to how the discretion shall be exercised. It depends entirely on the circumstances of each particular case".

In Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972, the following matters were identified as relevant to the exercise of the discretion:

a. the prospects of success of the appeal;

b. the quantum of risk that a costs order would not be satisfied;

whether the making of an order would be oppressive in that it would stifle a reasonably arguable claim;

whether any impecuniosity of the appellant arises out of the conduct complained of;
whether there are other aspects of public interest which weigh in the balance against such an order; and
whether there are any particular discretionary matters peculiar to the circumstances of the case.

The probable inability of an appellant to pay the respondent's costs should an appeal be unsuccessful has been held to constitute "special circumstances" which will justify an order under Rule 64.24(2) that the appellant give security for the costs of the respondent [See Challenge Charter Pty Ltd v Curtain Bros (Qld) Pty Ltd [2004] VSCA 66; [2004] 9 VR 382. The position is different in the High Court, the Federal Court and the New South Wales Supreme Court, where the Court places less emphasis on the impecuniosity of the appellant in considering whether to order security for the costs of the respondent (See Williams Civil Procedure, 164.24.80-162.4.85)]. In Mobilia v Voudiotis [2002] VSCA 72; [2002] 4 VR 327 ("Mobilia"), Batt JA (with whom Eames JA agreed) stated:

The Court's discretionary power to order that security for costs be given for the costs of an appeal is conditioned in r 64.24(2) upon there being "special circumstances". The probable inability of an appellant to meet an order for the respondent's costs of an appeal is a special circumstance: Scerri v Northam Holdings Pty Ltd. Such probability is amply established here ... The Court's discretion is therefore enlivened ...

23 The appellants submitted that they are not able to satisfy the judgment and if execution is not stayed, the respondents could institute bankruptcy and winding up proceedings. They submitted that the appeal would thereby be rendered nugatory, as it would be up to the trustee in bankruptcy or the liquidator of the relevant company to decide whether to proceed with it.

(a) neither he nor Bresam can satisfy the judgment. Further, on 19 October 2008 he received a creditor's statutory demand addressed to Bresam, which the respondents withdrew on or about 22 October 2008 at his solicitors' request.

(b) he owns no real property, no car and has personal property valued at $2,000, a joint bank account with his wife with a balance of $1,246.36, a NAB account with a balance of $61,292.15 and a savings account with a balance of $1,076.32.

(c) he is a beneficiary of the Johnston Family Trust, which has assets of $100, and is a discretionary trust. Johnston is not a director or shareholder of the corporate trustee. Bresam is the trustee of the Dennis James Johnston Family Trust, a discretionary trust which has assets of $100. Johnston is no longer a director of Bresam.

(d) a further company, P W & D J Properties Pty Ltd, is the corporate trustee of the Whitaker and Johnston Unit Trust, in which the units are held equally by the Peter and Joy Whitaker Family Trust and the Dennis James Johnston Family Trust. The Whitaker and Johnston Unit Trust does not trade, and has assets of $100.

25 Peter Whitaker, the fourth appellant, deposed that:

(a) he was a director of Melamybek during the trial, but is no longer a director. Neither he nor Melamybek is able to satisfy the judgment, and Melamybek was served with a creditor's statutory demand, which the respondents withdrew on 22 October 2008 at his solicitors' request.

(b) he owns no real property or car, has personal property of $2,000, a joint bank account with his wife with a balance of $1,427.25, a share in a race horse worth $1,500, shares worth $4,000 and 30 A class shares in Relisam Pty Ltd ('Relisam') entitling him to a dividend, as determined by the directors. Whitaker is not a director of Relisam.

(c) he is a beneficiary of the Whitaker Family Trust, a discretionary trust with assets of $150, and a beneficiary of the Peter and Joy Whitaker Family Trust, a discretionary trust which has assets of $100. He no longer controls Melamybek, the corporate trustee of those trusts, which indirectly holds equal units in the Whitaker and Johnston Unit Trust, as stated above. Whitaker has credit card liabilities totalling several thousand dollars.

26 Gerard Gleeson, of the solicitors for the respondents, deposed to his investigation of the appellants' financial circumstances as follows:

On or about 28 November 2008, the respondents' 'inhouse' accountant advised that a deposit of $550,000 was paid into the trust account of the appellants' solicitors on 28 November 2002, and the balance of the settlement sum for the purchase was paid by bank cheque to each of the appellant companies at settlement on 23 December 2002.
The appellants have funded the defence of protracted and expensive litigation, as their own estimate of the costs of the trial up to 4 September 2006 on a solicitor client basis totalled $378,000, with an additional estimated cost of $40,000 - $50,000 for experts' fees.
Company searches revealed that Johnston resigned as a director of Bresam on 31 January 2003 and was replaced by his wife. Whitaker resigned as a director of Melamybek on 31 January 2003.
Bresam and Melamybek are both subject to charges dated 2 September 2003 (in the case of Bresam) and 20 August 2003 (in the case of Melamybek) in favour of the respective wives of Johnston and Whitaker, each securing an amount of $2,200,000.
Johnston, despite an arrangement for a continuing consultancy in relation to the Insulform business, abruptly ceased to work in the business on or about 12 February 2003, due to a deteriorating relationship with the purchasers.
Until 10 April 2003, Johnston was, with his wife, the joint owner of a property at 36 Tourello Avenue, Hawthorn, which was transferred to her on that date for 'natural love and affection'. Another jointly owned property situated at 1739 Point Nepean Road, Rosebud was, on 2 June 2003, transferred to the sole ownership of Johnston's wife.
Yoshidog Pty Ltd ('Yoshidog') the trustee of the Johnston Family Trust (of which Johnston's wife, Rachelle Better-Johnston, is sole director and shareholder) owns another property situated at 1733 Point Nepean Road, Rosebud West, acquired on about 1 June 2004 for $385,000 from unrelated parties. Yoshidog's balance sheet showed that it owes Tourello Pty Ltd ('Tourello') the sum of $406,899. Johnston was a director of Tourello until 31 January 2003, when he ceased to be director. The present director and sole owner of all 60 issued shares in Tourello is Rachelle Better-Johnston.
Whitaker was a director of Relisam until 30 January 2003, when he resigned in favour of his wife, Joy Whitaker, the sole owner of all 60 issued shares in Relisam.

27 The supplementary affidavit of Mr Gleeson sworn 18 November 2008 provided the breakdown of bank cheques for payment of the balance of the purchase monies as follows:

28 Frederick Gerardson, the accountant of Messrs Johnston and Whitaker, by an affidavit sworn 18 November 2008 deposed to the accuracy of the financial statements exhibited to their affidavits.

29 Mr Gerardson deposed that when the purchase of the Insulform business was proposed, he advised that the most advantageous form of structuring the transaction would be by sale of the shares of Bresam and Melamybek and that the profits of the business could be distributed in a more tax affective way by establishing the companies, Tourello and Relisam.

It is accounting industry standard practice to advise clients that those who operate (whether on their own account or by corporate entities) have operated or are about to operate business do not have assets in their name and to ensure that assets, wherever possible, are held by those who are not active in either past, future or other businesses. In the case of married couples it is common for assets to be held by the non working member of the couple. I provided such advice to Johnston and Whitaker who acted on that advice. Additionally, Johnston told me that he intended to set up new businesses whilst Whitaker told me that his health was very poor and that his likely life expectancy was much less than that of his wife and that he wished to confer financial benefits on his wife and children whilst he was alive rather than leaving them to his wife and children on death. These matters further reinforced the desirability of putting in place measures which would have the effect of assets not being held in the names of Johnston and Whitaker.

31 Mr Gerardson deposed that Bresam and Melamybek each received $3,090,000 from the proceeds of sale and for 'tax reasons' distributed the money to the wives of Messrs Johnston and Whitaker as beneficiaries of their respective family trusts in early 2003. At the same time, on Gerardson's advice, Johnston and Whitaker resigned as directors of the relevant companies. Presale dividends were distributed to Tourello and Bresam in order to minimise taxation. The establishment of new trusts and the transfer of properties by Johnston to his wife were effected on the advice of Mr Gerardson, as 'part of this organisation of their affairs'.

32 Mr Gerardson deposed that at the time of the sale, a property owned by P W & D J Properties Pty Ltd as trustee of the Whitaker and Johnston Unit Trust was valued at approximately $4.4 million, resulting in a capital gain of $1.06 million in each Family Trust, which was distributed to each wife. Each wife then lent $2.2 million back to Bresam and Melamybek to enable them to repay the related party borrowings arising from the original acquisition of the property and to fund the distribution of the notional gain. The resultant debt of $2.2 million to each wife was secured by a charge. When the property was subsequently sold, the proceeds of sale were applied to repayment of the loans, so no advances were currently secured by the charges.

33 Mr Gerardson deposed that the appellants obtained funding for the litigation from assets held by Tourello and Relisam, the sale of assets, the superannuation of Johnston and Whitaker, and assets held by their wives.

34 The prospects of success on appeal should not, on an application for a stay, be considered extensively, although the applicant for a stay must establish an arguable ground of appeal. The appellants principally emphasised that:

(a) the respondents alleged that the vendors made unqualified representations and warranties that, inter alia, the future cost of materials would be 58% of sales. The trial judge found, however, a representation that there was a high probability (90%) that representations of future profitability and cost of materials would be achieved. The finding of a 'high probability' necessarily meant that they might not be achieved; and

(b) that, in turn, meant that the pleaded, unqualified promissory representations were not established.

35 The appellants further submitted that the representation found by the trial judge was inconsistent with the pleaded one, and the case found was not the pleaded case.

36 The appellants also challenged the trial judge's finding of fact, based on his preference of Simmons' evidence to that of Johnston, in relation to the 16 December 2002 conversation. They submitted that Simmons' version of events was contradicted by his contemporaneous notes, which the primary judge disregarded. The appellants contended that the trial judge's construction of the statement to which Simmons testified was, in any event, wrong, and simply indicated that 58% was a reasonable estimate 'going forward'.

37 The respondents submitted that the appeal was hopeless, as there was a complete coincidence between the representation pleaded and that found by his Honour, when they were understood in context. The appellants, it was said, conflated the representation found by his Honour with its effect.

38 His Honour found that the most important figure to the purchasers was the cost of materials as a percentage of sales. The costs of materials to sales ratio 'was a critically important figure in the operation of the Insulform business'. The cost of materials to sales ratio was directly related to annual gross profit and could be improved by lowering costs or increasing profitability (for example, by introducing new business), or both.

39 His Honour found that, at the meeting on 16 December 2002 shortly prior to the settlement of the contract, Simmons and Johnston discussed the purchasers' concern that the cost of materials to sales ratio had recently exceeded 60%, which jeopardised the purchase. His Honour accepted Simmons' evidence that Johnston said he should use a figure of 58% 'going forward'.

40 He found that, at the time, Johnston was aware that there were serious problems in the business which could affect the achievement of that figure. Nevertheless, Johnston left Simmons with the very clear impression that it was reasonable to adopt the target of 58% for future planning.

41 His Honour found that the principal representation relied on by the appellants was that, in future, cost of materials would be 58% of sales which, in context, conveyed a high probability that the cost of materials would be 58% of sales.

42 He found that the representation was made without reasonable grounds (in circumstances where the vendors knew that the purchasers would not have proceeded had they known that the actual cost of materials would be over 60% of sales) and was misleading.

43 His Honour found that the principal representation was a forecast, but 'not a representation that the forecast was guaranteed to be achieved'.

44 The primary judge also found a number of associated representations to the effect that an acceptable cost of materials figure could be achieved by various means. There is, in my view, no necessary inconsistency between a representation that there was a high probability that certain indicia of profitability would be achieved and a representation that the future cost of materials would be 58% of sales.

45 The primary judge had the advantage of assessing the witnesses and in addition to his assessment of their credibility, he relied on other evidence, such as that of Mr Cain.

46 While the volume and complexity of the judgment evidence, and grounds of appeal are such that I do not, on a preliminary assessment, conclude that there is no arguable ground of appeal, the appellants largely rely on an attack on findings of fact or credit, and an apparently fine distinction between a case as pleaded and a case as found. The prospects of success do not appear compelling.

47 I am not persuaded that the appeal will be rendered nugatory by reason of the possible bankruptcy or liquidation of the appellants. Bankruptcy and winding up proceedings against the appellants appear likely. Although statutory demands served on the companies were withdrawn, the respondents did not undertake to refrain from serving fresh notices. Further, although no bankruptcy notices have, as yet, been served on the individual appellants, before us, counsel for the respondents made plain that bankruptcy proceedings were contemplated.

48 Although, as recognised in Li & Anor v The Herald & Weekly Times Ltd & Anor,[2] the effect of a bankruptcy order on the prosecution of an appeal may, in a particular case, render an appeal nugatory and constitute special circumstances, a threat of liquidation or bankruptcy is not a decisive factor in every case. The weight to be accorded to it may vary.

49 The bankruptcy or liquidation of the appellants would merely diminish, rather than destroy, the prospects that the appeal will be prosecuted.[3] A liquidator (or trustee in bankruptcy) could elect to prosecute the appeal, depending, inter alia, on his or her assessment of the prospects of success and whether a source of funding is available. In the present case, the appellants concede that the wives of Messrs Johnston and Whitaker are willing to fund the appeal.

50 Counsel for the appellants submitted that the prospect of bankruptcy was distinguishable, in the present context, from that of liquidation, because:

(a) s 177 of the Bankruptcy Act 1966 (Cth) posed a practical impediment to the trustee's prosecution of an appeal; and

(b) bankruptcy constituted an inexpungable stain upon the status of the individual.

51 Those submissions are, in my view, unpersuasive.

52 First, the impact of any adverse effect of bankruptcy on reputation may vary according to the circumstances of the particular case.

53 Secondly, s 177 of the Bankruptcy Act does not preclude the prosecution of an appeal by the trustee in bankruptcy.

54 Thirdly, if bankruptcy notices were served, it would be open to the individual appellants to seek an extension of time for compliance pending the hearing and determination of the appeal.[4]

55 Fourthly, and more importantly, as counsel for the respondents submitted, in the circumstances of the present case, any adverse consequences of liquidation or insolvency (whether in relation to the prosecution of the appeal or the appellants' reputation) carry little weight.

56 In Advanced Building Systems Pty Ltd v Ramset Fasteners (Aust) Pty Ltd ('Advanced Building')[5] an appellant company was insolvent on the face of its accounts and the respondent had applied to wind it up. McHugh J refused the appellant's application for a stay, not on the technical basis that a stay was unnecessary to preserve the subject matter of the appeal, but rather, because he was not satisfied that the appellant could not raise the funds to pay the debt. Although the appellant company's current liabilities greatly exceeded its current assets, the principal liability was owed to a related company. The appellant's related entities had not enforced the payment of its liabilities over the years and the elimination of related party debts would produce a substantial surplus of current assets over current liabilities.

57 McHugh J did not accept the appellant's claim that it was unable to borrow the funds necessary to meet its debt to the respondent, observing that the evidence on the subject was 'rather cursory'.[6] He stated: 'Nothing has been put before me showing the relationship of the operations of [the appellant] to its related companies or that those companies could or would not lend moneys to pay the debt.'[7] His Honour also noted that the appellant's recent release of an interest in a property venture to a related company might require further investigation.[8]

58 In the present case, as the affidavit of Mr Gerardson makes plain, the appellants deliberately either divested themselves of proprietary interests for no commercial consideration or directed or acquiesced in the discretionary diversion of assets to related parties in order to ensure that such assets would be unavailable to satisfy liabilities incurred to creditors in the course of business. The appellants retain superannuation assets exempt from distribution to creditors on insolvency and retain access to a proportion, at least, of the resources of the related parties, which in total are sufficient to satisfy the judgment debt and thereby avert insolvency.

59 The material before the Court justifies the inferences that -

(a) the appellants' relationship inter se and with related parties is not governed by legal formalities. For example, although they have resigned as directors and shareholders of Bresam and Melamybek, Messrs Johnston and Whitaker swore affidavits on behalf of those companies without indicating the basis of their authority to do so.

(b) the appellants retain access to, and command of, assets to which third parties hold legal title pursuant to the arrangement to which Mr Gerardson deposed. Such assets have been made available to fund the defence of the litigation below and will be made available to fund the appeal. While we were informed that the assets would not (although sufficient to do so) be applied to satisfy the judgment debt, the appellants did not depose to any restriction on their access to the relevant resources or, necessarily, to the basis of any such restriction.

60 In such circumstances, as in Advanced Building, I am not satisfied that the appellants are incapable of raising the funds to pay the judgment debt. Impecuniosity in the present context is to be determined by reference to all the funds available to the appellants, rather than their strict legal entitlements.

61 In Orrong Strategies Pty Ltd v Village Roadshow Ltd[9] ('Village Roadshow'), Maxwell P and Ashley JA considered that the impecuniosity of an individual appellant (who had previously arranged his affairs in order to avoid exposure to losses which he could incur as a partner of an accounting firm), constituted exceptional circumstances justifying a stay, because:

(a) the arrangements, which were put in place long before the proceedings, were not directed at defeating the claim of the respondent; and

(b) the appellant's uncontradicted evidence was that bankruptcy, by disqualifying him from acting as a company director or practising as an accountant or (without leave of the Court) as a solicitor, would effectively eliminate his capacity to earn a living.

62 The present case is distinguishable from Village Roadshow, as there is evidence that, despite the impecuniosity of the appellants, resources of related recipients are available for selected purposes of the litigation. Further, the relevant appellants advanced no evidence that their income earning capacity would be destroyed by reason of bankruptcy.

63 There is no evidence that bankruptcy or winding up would reduce the value of any business conducted by the appellants or diminish the value of their assets.

64 In view of the appellants' disposition of assets, the indications of their continuing access to, and command of, resources transferred to related parties and the selective application thereof to fund the defence and the appeal, the court is entitled (in the absence of clear evidence to the contrary) to regard the appellants' current impecuniosity as self-inflicted and their potential subjection to the relevant insolvency regimes as a matter of choice.

The appellants' evidence of financial resources unsatisfactory

65 The respondents submitted, correctly in my view, that the appellants' affidavit material was unsatisfactory, in that it did not present a frank and complete account of their financial circumstances.

66 The appellants did not dispute that the wives of Messrs Johnston and Whitaker provided significant funding for the defence of the proceeding below and are willing to fund the appeal, but submitted:

The wives (and entities controlled by the wives) are not judgment debtors. Their assets are not available to the judgment creditors and nor is superannuation (s 116(2)(a) Bankruptcy Act 1996 (Cth). The fact that the wives are willing to make assets available to their husbands (for the purposes of the defence and this appeal) does not compel them to make them available to the judgment creditors in satisfaction of the judgment debt, as the price for the Appellants' continuation of the appeal.

67 The proceeds of sale of the Insulform business were distributed to the wives of Messrs Johnston and Whitaker and the proceeds of sale of a separate property discharged debts (previously secured by the company charges) owed to their wives. Although material adduced by the appellants disclosed their interests in various companies and trusts, it did not offer a comprehensive account of the total available resources held by related parties. The related entities' assets were not comprehensively set out, and the values of the transferred real properties and the equity therein were not given. The terms on which the related parties had provided funds and the total amounts available in future were not disclosed. Messrs Johnston and Whitaker did not, initially, refer to their superannuation assets.

68 A successful litigant is, prima facie, immediately entitled to the fruits of its judgment, which it may, in the ordinary course, enforce. In circumstances where the appointment of a liquidator or trustee in bankruptcy would only alter the likelihood that the appeal would be prosecuted, but would not destroy the prospect; the individual appellants could seek an extension of time for compliance with any bankruptcy notices; there is no evidence that the appellants conduct a business or profession which would be terminated, or own assets that would be diminished in value, as a result of any winding up or bankruptcy order; the prospects of success on appeal are not compelling; the appellants retain access (the limits of which were not explained) to the funds of related recipients of voluntary dispositions of assets, who funded their defence below and will fund the appeal: there are, in my opinion, no exceptional circumstances to justify the exercise of the discretion to stay the execution of judgment pending the hearing and determination of appeal.

70 By a summons filed on 10 November 2008, the respondents sought security for the costs of the appeal pursuant to r 64.24.2 of the Supreme Court Rules.

The Court of Appeal may in special circumstances make an order that security be given for the costs of an appeal.

72 John Fillmore, the solicitor for the respondents, by an affidavit sworn 10 November 2008, deposed to correspondence in which the respondents sought security for the costs of the appeal in the sum of $112,000 'because of the substantial risk that the respondents would be deprived of their costs if the appeal were to be decided in their favour'. Mr Fillmore noted that the appellants' impecuniosity was apparent from the affidavits. He deposed to 30 years experience as a solicitor and estimated the likely costs of a three day appeal at $112,000.

73 The appellants did not resist an order for security for costs. They conceded their own impecuniosity and inability to satisfy the judgment or to fund the appeal, but acknowledged that the necessary funds were available from their spouses or other sources. They did not submit that an order for security for costs would be oppressive.

74 Rather, the quantum of the security was in issue. The appellants contended that the respondents' estimate was excessive, as it was based on solicitor-client costs and did not make any allowance for the costs of the cross-appeal. The appellants, who relied, in that context, on the affidavits of Catherine Watt (sworn 17 November 2008) and Frederick Gerardson (sworn 18 November 2008) contended that the amount of the security should be no more than $50,000, payable in two equal instalments, the first within 45 days of the order and the second not less than 30 days before the hearing of the appeal.

75 Ms Watts exhibited to her affidavit the letter of Paul Lindell of Blackstone Legal Costing dated 13 November 2008. In Mr Lindell's opinion, the costs of preparation for the appeal on a party/party basis would amount to $28,100 and the costs of a three day appeal would amount to $33,342, totalling $57,942.

76 Mr Lindell pointed out that Mr Fillmore's estimates were based on a solicitor/client costs and exceeded, for example, the allowed range for counsel and the daily scale rate for solicitors, which is capped at $1,214 per day.

77 While it is ordinarily appropriate that security be awarded on the basis of party/party costs, the court has a discretion in relation to its calculation, which is not an arithmetical exercise. In the present case, the appeal will be funded by third parties whose assets are unavailable to satisfy the judgment debt; the appellants' impecuniosity is due, in part at least, to the deliberate organisation and voluntary disposition of the transferred assets to which they retain access for some purposes of the litigation; and the prospects of success on appeal are not compelling. The disparity between respondents' high exposure to, and the appellants' complete freedom from, risk of loss of the costs of the appeal in my view required a somewhat higher level of security than would ordinarily be appropriate. Allowing a discount for the costs of the cross-appeal, I considered that the appellants should provide security for the costs of the appeal in the sum of $80,000. There was, in my opinion, no basis on which to order payment in tranches. There was no evidence that those willing to fund the appeal are incapable of immediate payment of the security ordered.

[1] [2008] VSCA 122 (26 June 2008).

[3] Challenge Charter Pty Ltd v Curtain Bros (Qld) Pty Ltd [2004] VSCA 66; (2004) 9 VR 382; Cook's Construction Pty Ltd v Stork Food Systems Australasia Pty Ltd [2008] QCA 322 (Unreported, Queensland Court of Appeal, McMurdo P, Keane JA and White AJA, 14 October 2008).

[4] Gangemi v Osborne and Lanciana [2008] VSCA 221 (Unreported, Supreme Court of Appeal Victoria, Warren CJ and Neave JA, 6 November 2008.

Fair Trading Act 1999(Vic)

At a glance

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Judgment (114 paragraphs)

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