Catalano v Managing Australian Destinations Pty Limited

Federal Court of Australia|2014-05-15|Before: Bennett J, Rares J

REASONS FOR JUDGMENT (REVISED FROM THE TRANSCRIPT) 1 On 8 May 2014, the Full Court published its reasons as to why it proposed make an order allowing the appeal and, among other things, appointing a liquidator to Fine Food Solutionz: Catalano v Managing Australia Destinations [2014] FCAFC 55. I will use the same abbreviations as in those reasons. The Full Court's principal order was in the following terms: "1. Unless the Court otherwise orders on or before 4 pm on 14 May 2014 the following orders take effect as the orders of the Court determining the appeal and cross-appeal on 15 May 2014: 1. The appeal be allowed. 2. The cross-appeal be dismissed. 3. Orders 2, 3, 4, 6, 7 and 8 made by the primary judge on 13 September 2013 be set aside and in lieu thereof it be ordered that: (1) Fine Food Solutionz Pty Ltd be wound up. (2) [ ] be appointed as liquidator of Fine Food Solutionz Pty Ltd. (3) There be no order as to costs of the proceedings and cross-claim. 4. There be no order as to costs of the appeal and cross-appeal." (emphasis added) 2 Notably, the Court's order was conditional upon it otherwise ordering on or before 4:00 pm yesterday.

The recusal application 5 The Kurth-Hepner camp argued that I should recuse myself from hearing the stay application on the ground that the parties or the public might entertain a reasonable apprehension that I might not bring an impartial or unprejudiced mind to the resolution of the questions involved. They made that submission without appreciating the jurisdictional issue that the Full Court, of which I am a member, has not yet made its final orders in the appeal. 6 I reject that argument. I do not consider that I should recuse myself. A fair-minded lay observer would not reasonably apprehend that I might not bring an impartial or unprejudiced mind to the resolution of the question that I am asked to decide: Michael Wilson & Partners Limited v Nicholls (2011) 244 CLR 427 at 437 [31]; GlaxoSmithKline Australia Pty Limited v Reckitt Benckiser Healthcare (UK) Limited [2013] FCAFC 150 at [31] per Allsop CJ, Middleton and Katzmann JJ. A fair-minded lay observer would be well familiar with the fact that both trial judges and appellate judges regularly are asked to grant stays of orders, including final orders, which they have made in contested litigation and are able to consider whether to do so without prejudgment or an appearance of bias.

The test for a stay of final orders disposing of the appeal 7 The issue before me is the familiar territory where an unsuccessful party in appellate proceedings seeks a stay of the coming into effect of the orders against it so that it might seek special leave to appeal to the High Court of Australia. An applicant for special leave to appeal is a person who seeks to persuade the High Court of Australia under s 35A of the Judiciary Act 1903 (Cth) to exercise its jurisdiction to grant special leave to appeal to that Court if the challenged decision, relevantly, involves either a question of public importance or circumstances where the grant would be in the interests of justice. 8 Relevantly, in such an application, the court must consider the four issues raised by Brennan J in Jennings Construction Limited v Burgundy Royale Investments Pty Limited (No 1) (1986) 161 CLR 681 at 685, namely, (1) whether there is a substantial prospect that special leave to appeal will be granted; (2) whether the applicant has failed to take whatever steps are necessary to seek a stay from the court in which the matter is pending; (3) whether the grant of stay will cause loss to the respondent; and (4) where the balance of convenience lies. 9 As is clear, the second issue is not relevant here, since I am considering that very question. Brennan J addressed an argument by the respondent that special leave was unlikely to be granted, saying that (161 CLR at 685): "It is undesirable to canvass the arguments in advance. I do not, however, think that the prospect of a grant of special leave is insubstantial." 10 In that case, his Honour granted a stay on conditions that the applicant seek special leave, prosecute any appeal with all reasonable expedition and give an undertaking as to damages. When I inquired of the Kurth-Hepner camp's counsel as to what, if any, undertakings were offered, he obtained instructions that an undertaking as to damages would be offered, that his clients would maintain the assets of, preserve the status quo in, and not increase the borrowings of Fine Food Solutionz pending the hearing and disposition of any application for special leave to appeal and any appeal. 11 The third question identified by Brennan J is whether a stay would cause loss to the respondents or other relevant party, here being the successful Catalano camp. If a stay were granted, they would be kept out of the opportunity, for a longer period, of being able to treat with the liquidator for whatever business or assets of Fine Food Solutionz the liquidator was minded to offer for sale to whomever and in the manner that the liquidator might consider appropriate. There would be further delay in the resolution of the issues but that is, in a sense, an inevitable consequence of litigation. 12 The real issues come down to the first and fourth questions identified by Brennan J, namely whether there is a substantial prospect that special leave to appeal will be granted and where the balance of convenience lies. Notwithstanding that I do not consider that I should recuse myself, I am mindful of what Mason CJ, Brennan and Gaudron JJ said in Paringa Mining & Exploration Co PLC v North Flinders Mines Limited (1988) 165 CLR 452 at 459 of the position a judge at first instance who had refused to grant an injunction pending an appeal in circumstances where the refusal was said practically to preclude the granting of the substantive relief claimed in the action. They said that it was not satisfactory to leave the exercise of the appellate discretion to grant or refuse the injunction pending the appeal to the judge at first instance whose decision was under review. 13 However, the position here is that the Full Court has allowed the appeal unanimously and determined that a winding up order should be made. If that order is not stayed, it will have an immediate effect that, for practical purposes, will be likely to bring this litigation to an end. I should note that, at this stage, no application for special leave to appeal has been filed, but a draft is before me and was before Bennett J yesterday. In exercising the discretion to grant a stay pending the prospective filing of such an application, I am mindful that the Full Court, including a single judge of such a Full Court, is in a different position to a trial judge. A trial judge's decision is subject to full appellate review on a rehearing and the exercise of the appellate jurisdiction of the Court.

The Kurth-Hepner camp's submissions 14 The Kurth-Hepner camp argued that the current circumstances require the grant of a stay of the winding up order that the Full Court will make (once the liquidator's name is inserted) pursuant to its orders of 8 May 2014, notwithstanding any apparent weaknesses in their case. They contended that their claim for a grant of special leave is not insubstantial and that the substantively final consequence of the refusal of a stay weighs heavily in the balance in their favour. They referred to what Bathurst CJ, Beazley & McColl JJA said in Rinehart v Welker (2012) 83 NSWLR 347 at 358 [49] that it is not an essential prerequisite for a grant of a stay that the court find that there are substantial prospects of success on the special leave application. They said that: "There may be cases, albeit rare, when the other factors material to the grant of a stay may be of such significance that a stay should be granted even if this Court is unable to reach the view that the application has substantial prospects of success." 15 The Kurth-Hepner camp argued that, in some cases, the factor that there is a substantial prospect that special leave to appeal would be granted by the High Court may be a factor while in others the inability to restore the parties to their respective positions if the stay order were refused might be given particular weight. They pointed to the fact that, if a winding up order were made and the liquidator determined not to carry on the business of Fine Food Solutionz, the company's four full-time, and two part-time, employees who depend on it for their livelihoods may lose their employment and it may lose its supply contracts with Coles and Woolworths, its two major customers who account for about 80% of its business. Each of those supplier contracts would give the purchaser a discretion to cancel existing orders and not make further orders in the event that a winding up order were made. The Kurth-Hepner camp also argued that a winding up order may have a particular impact on Barramundi Gardens. In his affidavit sworn 14 May 2014, Mr Kurth said he understood that Fine Foods Solutionz accounted for 90% of Barramundi Gardens' business. He said that the likelihood was that, if the liquidator decided not to continue operating the business, at least eight production staff with Barramundi Gardens would lose their jobs. These are clearly serious consequences that must be weighed in the overall exercise of my discretion.

The basis of the special leave application 16 The draft application for special leave to appeal has obviously been prepared in great haste and in a shorter time frame than provided by the time limit in the High Court rules for its filing. Bennett J adjourned the proceedings yesterday principally because she required counsel for the Kurth-Hepner camp to identify what was or were the point or points that constituted the substantive argument on which the High Court might be persuaded to grant special leave to appeal. 17 The application asserted that the Full Court erred in a number of ways that, in my opinion, really amount to no more than assertions that it erred in making findings of fact or in giving the weight it gave to matters in arriving at the exercise of its discretion under s 233(1)(a) of the Corporations Act 2001 (Cth) to make the winding up order. It is important to remember that that section provides: "(1) The court can make any order under this section that it considers appropriate in relation to the company, including an order: (a) that the company be wound up; …" 18 In substance, the draft application for special leave asserted that the Full Court erred: (1) by failing to consider, or properly consider: the conduct of the Kurth-Hepner camp in setting up Gourmet Dim Sim Company Pty Limited; that they were acting reasonably and, in effect, in self-defence, or in defence of the interests of Fine Food Solutionz as a whole, in circumstances where the Catalano camp were oppressing them, as found by the primary judge; (2) in finding that the Kurth-Hepner camp had acted oppressively towards the Catalano camp in the affairs of Fine Food Solutionz; (3) in finding at [19], contrary to findings made by the primary judge, that the Kurth-Hepner camp had objectively engaged in conduct oppressive of the Catalano camp and in applying Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 at 341-343; (4) by exercising its discretion without considering or properly considering the question of oppression and the related question of fairness as a whole and without proper regard to what the primary judge found when the Full Court's reasons expressly affirmed his finding of oppressive conduct by the Catalano camp and that, in so doing, the Full Court took "a narrow view" of individual aspects of conduct, separate and discrete, from the overall conduct of the parties; and (5) in finding at [47] that a winding up order was the only appropriate order, given the deadlock and existence of the mutually oppressive conduct that it had found in circumstances where the primary judge and the Full Court [sic] had not made a finding of deadlock, notwithstanding that the primary judge's orders for the Catalano camp to transfer its shares in Fine Food Solutionz had been complied with.

The Kurth-Hepner camp's argument 19 During the course of argument I pressed counsel for the Kurth-Hepner camp to identify what it was in the reasons for judgment of the Full Court that he said the Court had either erred in doing or failed to do and where support could be drawn for his complaints. In essence, he argued that the matter came down to an unusual issue in which both sides had alleged oppression. He contended that the Full Court had failed to look at the whole of the circumstances and weigh them appropriately. He submitted that the Full Court should have found that there was overwhelming oppression by the Catalano camp. That, in substance, made whatever oppression they (the Kurth-Hepner camp) had engaged in insignificant. 20 In essence, the Kurth-Hepner camp contended, in the oral argument today and in elaboration of the stated grounds for special leave to appeal, that their oppression by the Catalano camp found by the primary judge and affirmed by the Full Court outweighed, significantly or almost completely, any characterisation of their own conduct as oppressive. The Kurth-Hepner camp also argued that it was not open to the Full Court to make a winding up order when both parties had disclaimed that relief before the primary judge.

Consideration 21 I reject the last argument. It cannot be right, since the Catalano camp, on appeal, specifically asked for a winding up order and that order was pleaded by it as relief. The Full Court was dealing with the situation that the primary judge found on the facts. It held that his Honour had made an error in how he had assessed the conduct of the Kurth-Hepner camp by focusing on the motives of Messrs Hepner and Kurth in assessing whether there was commercial unfairness. The Full Court found that there was no doubt that they had engaged in oppressive conduct against the Catalano camp based on the uncontested findings of the primary judge with respect to their establishment and conduct of the business of Gourmet Dim Sim. 22 In my opinion, the Kurth-Hepner camp's principal argument failed to come to grips with the fact that the Full Court was exercising a discretionary judgment, pursuant to s 233(1)(a) of the Corporations Act, as to the relief that it considered appropriate in relation to Fine Food Solutionz. The principles for attacking the exercise of a discretionary judgment on a matter of substance are well known and are set out in the judgment of Dixon, Evatt and McTiernan JJ in House v The King (1935) 55 CLR 499 at 504-505; see also Norbis v Norbis (1986) 161 CLR 513. In House (55 CLR at 504-505), their Honours said: "It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred." 23 The Full Court determined that his Honour had erred in his application of the law to the facts. It then fell to the Full Court to exercise the discretion based on the primary judge's findings of fact properly understood. That is what the Full Court did. In those circumstances, the Kurth-Hepner camp would need to rely, in an application for special leave, on a ground that the Full Court's exercise of its discretion under s 233(1) was affected by an arguable error in the sense identified in House 55 CLR at 504-505. 24 However, the argument made by the Kurth-Hepner camp comes down to no more than that the weight which the Full Court gave to particular factors is not the weight that they contend ought to have been given to them. I am of opinion that that is not an error of a kind that would warrant the grant of a stay. This is because there is very little prospect of the High Court granting special leave to appeal in order to review the weighing process without there being any particular error of a substantive kind necessary to warrant setting aside the exercise of such a discretionary judgment arrived at after the weighing process identified above. 25 The Kurth-Hepner camp's argument that the Full Court took a "narrow view" of the facts and that it did not find a deadlock in the conduct of the affairs of Fine Food Solutionz is, in my opinion, without substance. The Full Court said in its reasons at [6]: "In view of our conclusion that both camps have engaged in oppressive conduct and because the business relationship has irretrievably broken down, there is, in our opinion, a compelling case for the making of an order for the winding up of the company under s 233(1)(a) of the Act: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 ("Campbell") at 360 [177] per Gummow, Hayne, Heydon and Kiefel JJ." 26 The Full Court found that, on the findings made by the primary judge, it was clear beyond argument that the parties had an irretrievably fractured relationship and that they were in deadlock. The significance of those findings was not recognised by his Honour in relation to the consequence that flowed. Each of the Catalano and Kurth-Hepner camps set about running separate businesses which, as the Full Court found, constituted, among other things, acts of oppression by each side of the other. 27 In my opinion, there is insufficient, and indeed very little, prospect that the above argument would attract a grant of special leave to appeal. It did not identify any error of principle made by the Full Court in arriving at its conclusion. 28 Secondly, the Catalano camp had sought as primary relief at the hearing of the appeal an order that Fine Food Solutionz be wound up. It is true that that order may have a significant and drastic potential consequence. However, it may be that the parties will be able to persuade the liquidator, or provide him with funds, to carry on the business. The evidence before me demonstrates that, at the present time, the business is still running at a loss, albeit that there is evidence that its financial position is projected to improve, so that it may well be profitable over the course of the next six months. 29 No doubt, the parties will pursue their respective interests in pursuing the opportunity to purchase a viable business and equipment from the liquidator. They will have some interest in preserving the status quo, if that is possible, albeit that there is very little likelihood they will do so by any cooperative effort, having regard to their stances in the litigation. 30 While the potential impacts of a winding up on Fine Food Solutionz' employees and Barramundi Gardens are significant factors, at the end of the day, the assessment I must arrive at is whether there is a sufficient justification for the grant of a stay based on the prospects that special leave to appeal will be granted. Although counsel for the Kurth-Hepner camp has put every argument that could possibly be put, I am unable to find that any of them is sufficiently persuasive, alone or in combination, that there is any real prospect of success on a special leave application. This is not one of the rare cases in which a stay should be granted: Rinehart 83 NSWLR at 358 [49].

Conclusion 31 For these reasons, I refuse the application for a stay. I will order that the interlocutory application filed on 14 May 2014 be dismissed with costs. I certify that the preceding thirty-one (31) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.

Associate: Dated: 6 June 2014 SCHEDULE NSD 2054 of 2013 BETWEEN: NATHAN CATALANO First Appellant MAUREEN AND NATHAN CATALANO AS TRUSTEES OF THE EQUICAP PTY LIMITED PROVIDENT FUND (ABN 70 739 750 546) Second Appellant SAMUEL CATALANO Third Appellant AND: MANAGING AUSTRALIAN DESTINATIONS PTY LIMITED First Respondent BYRON KURTH Second Respondent JUY GEPNER Third Respondent KURTH MANAGEMENT PTY LTD (ACN 102 842 580) Fourth Respondent GOURMET DIM SIM COMPANY PTY LIMITED (ACN 156 541 712) Fifth Respondent BEN LYDEN Sixth Respondent FINE FOOD SOLUTIONZ PTY LIMITED (ABN 83 134 923 005) Seventh Respondent JUY HEPNER Cross Appellant MAUREEN AND NATHAN CATALANO AS TRUSTEES OF THE EQUICAP PTY LIMITED PROVIDENT FUND (ABN 70 739 750 546) Cross Respondent NATHAN CATALANO Cross Respondent

Corporations Act 2001(Cth)s 233(1)(a)

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