Challenge Charter Pty Ltd & Anor v Curtain Bros

5. Challenge Charter relies on 57 grounds of appeal and Timor Star relies on four grounds of appeal, but they may be grouped. For example, most of Challenge Charter's grounds relate to an alleged sale of the MV Xanadu by Challenge Charter to the Curtain Bros. Group. The main issues in the appeal, judging from the grounds, relate to (a) that alleged sale, including questions of estoppel; (b) Papua New Guinea Dockyard's claim against Challenge Charter for works performed on the Xanadu and wharfage charges, the subject of paragraph 4 of his Honour's judgment; and (c) Papua New Guinea Dockyard's claim against Timor Star for the removal of sand and wharfage charges in relation to the MV Kayuen, the subject of paragraph 3 of the judgment.

8. Challenge Charter concedes that it is unable to pay the amount due under paragraph 4 of the judgment or any significant part thereof. Timor Star, by contrast, offers to pay the $28,518 and US$61,842 into an interest-bearing trust account or trust accounts jointly administered by the parties' solicitors as the price of a stay. Timor Star also offers to pay "a reasonable amount" by way of security for costs.

11. It is convenient to begin with the application for security. As I have said, Challenge Charter is unable to pay the amount of the judgment against it. It has no assets other than the Xanadu, which Gillard, J. found was of little or no value, and 650,000 of the 650,002 shares in Timor Star. Its unaudited accounts show no significant income and a deficiency of assets over liabilities when one subtracts its unsuccessful claim against the respondents. Timor Star is in a better position. Its unaudited accounts show a small excess of assets over liabilities, ignoring moneys due from Challenge Charter, and a small profit. There are substantial borrowings from related entities.

14. Nevertheless the appellants' own material shows that the combined assets and liabilities of Challenge Charter and Timor Star would, on a forced winding up, result in a deficiency of some $900,000 even without taking into account the moneys due under the judgment. The appellants can continue to operate only with the support of related entities. All their assets are the subject of registered debenture charges granted after the judgment was given. Initially the appellants refused to provide an explanation for those charges, but an explanation has since been proffered on the basis of "information with no reason to doubt it" in an affidavit sworn by Allan Nahum, a chartered accountant, and filed on their behalf. Mr Houghton submits, I think correctly, that that evidence is inadmissible.

17. In the light of the foregoing, in my opinion, the requirement of special circumstances in Rule 64.24(2) is satisfied and it is only just that the appellants provide security for the costs of the appeal.[1] Timor Star has, as I have said, offered to provide security. Its primary position is that that security should be only in respect of its appeal but, if the Court so required, Timor Star would give security for the whole appeal. In the light of the conclusion that I have reached on the stay application, I think it is preferable that there be separate orders for security for costs, one in respect of Challenge Charter's appeal and the other in respect of the appeal by Timor Star.

20. So far as the quantum of security is concerned, the respondents rely on an affidavit of Raymond de la Rue, a legal costs consultant, sworn on 18th March 2004. He estimates the costs of the appeal at $127,865. The appellants rely on an affidavit of Margaret Vine, a solicitor practising exclusively in the area of legal costs, sworn on 7th April 2004. She explains her reasons for differing from Mr de la Rue in relation to 13 items and estimates the respondent's costs at $54,299. The main differences between the estimates relate to preparation and the length of the hearing. I agree with Ms Vine that too much has been allowed, on an application for security for costs, for the former and that the hearing should be estimated at three days, not six. The issues are more limited than the grounds of appeal would suggest and the Court would not tolerate unnecessarily prolix oral submissions. The parties, and in particular Challenge Charter, will be required to summarize their arguments in their outlines of submissions with appropriate references to the paragraphs of his Honour's reasons and pages of the transcript. Allowing for less preparation, although more than that sanctioned by Ms Vine, and a three day hearing and accepting some of Ms Vine's other criticisms, I would fix the quantum at $72,000.

23. As I propose that there be separate orders for security for costs, it is necessary to apportion that sum between the appellants. Mr Sifris conceded that, if Challenge Charter's appeal stood dismissed on a failure to provide security, the respondents would still incur the costs of Timor Star's appeal and that that would occupy at least half a day in court. In estimating costs, that is the equivalent of a one day hearing. Moreover, not all the costs vary with time in court. Some costs are fixed in amount. Nevertheless, counsel argued, Timor Star's share should not be more than one third. That was because, if its appeal proceeded alone, only one argument would be advanced, namely, that there was an agreement that the charges for removal of sand and wharfage were to be paid only if the Kayuen was sold. No doubt there would be subsidiary arguments but, accepting counsel's assurance that that would be the only substantial argument, I would apportion the quantum of the security as between Challenge Charter and Timor Star in the sums of $48,000 and $24,000 respectively.

26. The appellants seek a stay on four bases. The first is that, in their contention, the appeal is based on reasonable and arguable grounds.[2] The second is that, without a stay, it may not be possible to restore the appellants to their former position, either because of what is said to be the poor financial state of Papua New Guinea Dockyard and its tight cash flow or because they will have been wound up. Statutory demands have been served on each of them in respect of the amounts due under the judgment. Thirdly, as I have already mentioned, Timor Star has offered to pay the amounts referred to in paragraph 3 of the judgment into an interest-bearing trust account or trust accounts jointly administered by the parties' solicitors and is willing to provide security for costs. Fourthly, Challenge Charter is unable to pay the amount of the judgment against it or any significant part of that judgment, but it says that that is a reason why a stay of paragraph 4 would not cause Papua New Guinea Dockyard any relevant prejudice.

29. The law in Victoria is that special or exceptional circumstances must be shown before a stay is granted.[3] An offer to pay the judgment debt into an interest-bearing trust account is relevant to the discretion to be exercised, but it is not enough on its own. Only a provisional estimate may be made of the strength of the proposed grounds of appeal relating to paragraphs 3 and 4 of the judgment. The Court explored those grounds with counsel, with particular emphasis on the basis on which Challenge Charter appeals against Gillard, J's conclusion that it was liable to pay wharfage to Papua New Guinea Dockyard. Wharfage accounts for more than US$180,000 of the US$213,520 the subject of paragraph 4. We inquired whether there had been a claim for a quantum meruit, because that might be important if his Honour's conclusion were upheld that there was no sale of the Xanadu or estoppel. A claim for a quantum meruit was made in paragraphs 42 and 43 of the amended defence and counterclaim.

32. The more important issues relate to Papua New Guinea Dockyard's financial state and the threat of liquidation. Mr Nahum initially examined the audited accounts of Papua New Guinea Dockyard as at 31st December 2002. He deposed that they disclosed a shortfall of assets compared with liabilities of the order of 15 million kina. The company's main asset was a building last valued in January 2001 and the accounts did not contain some of the statements that would be required under Australian law and auditing standards. He also expressed concern about perceived discrepancies between the financial reports and the directors' report and about the practical consequences of a debt of almost 23 million kina owing to related companies. Mr Nahum concluded that there was a very high risk that any payments made pursuant to the judgment might not be recoverable if the judgment were reversed on appeal.

35. Relying on an affidavit sworn by Stephen Thompson on 19th April 2004 and Gillard, J.'s description of its dock facilities at [44] of the reasons for judgment, the respondents argue that Papua New Guinea Dockyard in fact has significant operating revenue and assets. Its major liabilities, excluding the intercompany loan, are not current. It has a surplus of current assets over current liabilities. The discrepancies that concerned Mr Nahum were, at least in part, based on a mistake. The accounts for the year ended 31st December 2002 disclosed a net profit of nearly five million kina. A net profit of some two-and-a-half million kina was made in the following 12 months. The respondents submit that there is no basis for an assertion that Papua New Guinea Dockyard will be unable to repay the judgment sums if the appellants are ultimately successful.

38. Mr Nahum swore a further affidavit on 21st April 2004. He was still of the opinion that there was a very high risk that any payments made pursuant to the judgment might not be recoverable. He drew attention, among other things, to a chattel mortgage and three fixed and floating charges over the whole of Papua New Guinea Dockyard's assets and undertaking; to a shortfall of assets compared with liabilities of the order of 20 million kina for the year ended 31st December 2003; and to a negative reserve which, if it was a provision against an unexpected loss, would have reduced the profit of some two-and-a-half million kina for that year to a loss of just over five million kina. He also observed that, if there was a profit, it was largely because no interest had been charged on the intercompany loan.

41. The respondents point out that it is not only Papua New Guinea Dockyard that has granted charges over its assets. The appellants' assets are subject to registered debenture charges granted after the judgment was given. The respondents contend that, unless a liquidator can set those charges aside, it is most unlikely that Papua New Guinea Dockyard will recover any of the fruits of the judgment if unconditional stays are granted. The period of two years applicable to an uncommercial transaction is already running. The appellants respond to that submission by saying that Challenge Charter (I put Timor Star to one side) had hardly any assets even before the debenture charge over its assets was granted. Its balance sheet as at 31st December 2003 does, nevertheless, disclose some assets other than its claim against the respondents. They are the Xanadu and the shares in Timor Star and two amounts totalling $54,000.

44. I accept that Papua New Guinea Dockyard's financial position is not at all strong but not that its condition is as parlous as the appellants contend. Its tight cash flow, admitted by two of its officers at the trial, cuts both ways. It shows that, if the appeal is successful, there may be substantial delay before the judgment sums are repaid but, by the same token, a company with a tight cash flow can ill afford to wait for payment for work performed and wharfage charges. It is also to be borne in mind that, if the appeal is successful, the Court would make an order for restitution together with interest at a commercial rate and that order would be enforceable as a judgment.[4] Both Papua New Guinea Dockyard's financial position and its cash flow are to be taken into account, but they are not decisive.

47. I turn to the threat of liquidation, noting at the outset that there is reason to be cautious in considering the decision of the New South Wales Court of Appeal in Kalifair Pty. Ltd. v. Digi-Tech (Australia) Ltd.[5], on which the appellants relied. Its reasoning is, in part, dependent on Alexander v. Cambridge Credit Corporation Ltd.[6] and the proposition that it is not necessary for the grant of a stay that special or exceptional circumstances be made out.[7] Even more fundamentally, the decision appears to announce a black and white rule. I say "appears" advisedly and with respect, because the judgment may reflect concessions that were made, including those recorded at [14] and [25].

50. In my opinion, the relevance of a threat of liquidation and the weight to be given to it vary from case to case.[8] Sometimes it is significant that a winding up order will bring a company's business to an end or diminish the value of its assets or both or that the company, regarded as a legal person, will cease to exist when the winding up is completed. Whatever may be said of Timor Star, none of those considerations has much weight in relation to Challenge Charter. It has no significant business or assets other than the Xanadu and the shares in Timor Star. It has only one director and is the wholly-owned subsidiary of another proprietary company. In such a case it is not irrelevant that the liquidator may still pursue the appeal if he or she considers that to be worthwhile. The liquidator would take into account the director's views and the director would be well placed to assist the liquidator if the appeal proceeded. It is quite wrong to regard it as the director's appeal.[9] It is the company's appeal. Mr Sifris submitted that it was unfair to the director to displace him, but that is not the test. I am not persuaded that it would be unfair to Challenge Charter for a liquidator to evaluate the prospects of its appeal. An unpaid creditor is prima facie entitled to use the processes of company law to

53. recover a debt owing to it and there is a public interest in insolvent companies being wound up.[10]

56. The respondents do not oppose a stay of paragraph 3 or 4 of the judgment if the relevant company, Timor Star or Challenge Charter, pays the judgment sum into an interest-bearing trust account or trust accounts, provides adequate security for the costs of the appeal and secures the respondents' costs of the trial. Timor Star is willing to comply with the first two of those conditions. I do not consider that the third condition should be imposed. The appeal is distinct from the proceeding at first instance. It should not be used as a vehicle to put the respondents in a stronger position as regards the untaxed costs below. No stay has been sought in relation to the order for costs that Gillard, J. made.

59. In the circumstances I have described, I would grant the application that paragraph 3 of the judgment be stayed but I would refuse the application that paragraph 4 be stayed. As previously indicated, I would make separate orders for security for costs totalling $72,000.

64. I agree that security for costs should be provided in the amounts proposed by Callaway, J.A. I also agree with his Honour that, on an application for a stay of the impugned judgment pending the hearing and determination of the appeal, the relevance of a threat of liquidation of the applicant if no stay were granted and the weight to be given it vary from case to case. I consider that, in the context of these proceedings and for the reasons given by his Honour, a stay should be granted in respect of the judgment in the Timor Star proceeding on the condition stated by his Honour but no stay should be ordered in the Challenge Charter matter.

69. The Court makes the following orders on the summons filed on behalf of the respondents on 19th March 2004:

1. That the first appellant give security for the costs of its appeal either -

(a) by paying into court the sum of $48,000 by way of security; or

(b) by providing to the Prothonotary in a form acceptable to him security in the said sum.

2. That that security be given by 4 p.m. on 4th June 2004.

3. That, if the security is not given by that time, the appeal by the first appellant stand dismissed with costs.

4. That, pending the giving of the security, all proceedings in the first appellant's appeal be stayed.

5. That the second appellant give security for the costs of its appeal either -

(a) by paying into court the sum of $24,000 by way of security; or

(b) by providing to the Prothonotary in a form acceptable to him security in the said sum.

6. That that security be given by 4 p.m. on 4th June 2004.

7. That, if the security is not given by that time, the appeal by the second appellant stand dismissed with costs.

8. That, pending the giving of the security, all proceedings in the second appellant's appeal be stayed.

9. That the costs of the application be costs in the appeals by the first and second appellants, if necessary divided equally between them.

The Court makes the following orders on the summons filed on behalf of the appellants on 1st April 2004:

1. That, upon the second appellant undertaking to the Court by counsel that within 21 days it will pay the sums of $28,518 and US$61,842 into one or more interest-bearing trust accounts with a bank under the joint control of the solicitors for the second appellant and the solicitors for the respondents to abide the result of the second appellant's appeal or further order, paragraph 3 of the judgment given by the Honourable Justice Gillard on 11th February 2004 be stayed pending the hearing and determination of that appeal, or its dismissal pursuant to the order for security for costs made this day, or further order.

2. That the application for a stay of paragraph 4 of the judgment be refused.

3. That the costs of the application be costs in the appeals by the first and second appellants, if necessary divided equally between them.

[1] See generally Smail v. Burton [1975] VicRp 76; [1975] V.R. 776 at 777.

[2] Compare Commonwealth Bank of Australia v. Eise (1991) 6 A.C.S.R. 1 at 2.

[3] See especially Cellante v. G. Kallis Industries Pty. Ltd. [1991] VicRp 99; [1991] 2 V.R. 653 at 657.

[4] See, for example, Mallesons Stephen Jacques v. Trenorth Ltd. [1999] 1 V.R. 727 at 741 and Meerkin & Apel v. Rossett Pty. Ltd. (No. 2) [1999] VSCA 10; [1999] 2 V.R. 31.

[5] [2002] NSWCA 383; (2002) 55 N.S.W.L.R. 737.

[6] (1985) 2 N.S.W.L.R. 685.

[7] Kalifair Pty. Ltd. v. Digi-Tech (Australia) Ltd. at [17].

[8] Compare Advanced Building Systems Pty. Ltd. v. Ramset Fasteners (Aust.) Pty. Ltd. [1997] HCA 24; (1997) 71 A.L.J.R. 814 at 816. It is also interesting to notice what McHugh, J. said when his Honour refused to expedite the special leave application in Kalifair Pty. Ltd. v. Digi-Tech (Australia) Ltd., which thereafter did not proceed: see Digi-Tech (Australia) Ltd. v. Kalifair Pty. Ltd. (unreported, High Court of Australia, 18th February 2003).

[9] Compare Kalifair Pty. Ltd. v. Digi-Tech (Australia) Ltd. at [22].

[10] In some cases it may be relevant to the grant or refusal of a stay that a pending appeal may be taken into account on an application for winding up.