Chint Australasia Pty Limited v Cosmoluce Pty Limited

Civil Procedure Act 2005 [NSW] LEGISLATION CITED : Imprisonment of Fraudulent Debtors Act 1958 [Vic] Magistrates (Summary Proceedings) Act 1975 [Vic] Uniform Civil Procedure Rules 1995 (NSW)

CASES CITED : Cahill v Howe [1986] VR 630 Lewis v Leslie [2001] VSC 110

PARTIES : Chint Australasia Pty Limited (Plaintiff) Cosmoluce Pty Limited (Defendant)

COUNSEL : Mr MJ Leeming SC, Mr MJ O'Meara (Plaintiff) Mr JM Miller (Defendant)

SOLICITORS : Corrs Chambers Westgarth (Plaintiff) Dibbs Abbott Stillman (Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50065/07 Chint Australasia Pty Ltd v Cosmoluce Pty Ltd JUDGMENT The background 1 On 27 June 2008 judgment was given in favour of the plaintiff (Chint) in the sum of $5.333 million plus interest from 16 June 2008 following a five day trial (see [2008] NSWSC 635). The defendant (Cosmoluce) has not appealed. 2 On 29 July 2008 Cosmoluce applied under Rule 37.3, Uniform Civil Procedure Rules 2005 (UCPR) to pay its judgment debt in instalments over a period of almost two years, commencing in August 2008 and ending in July 2010. The instalments proposed by Cosmoluce were seven instalments of $50,000 per month from August 2008 to February 2009, an instalment of $3,833,000 in March 2009, a further 16 instalments of $50,000 per month from March 2009 to June 2010 and a final instalment of $897,028.80 in July 2010. 3 On 27 August 2008, Registrar Walton granted Cosmoluce's application (the instalment order).

The notice of motion seeking rescission of the instalment order 4 By notice of motion dated 10 September 2008, Chint applied under Rule 37.3, UCPR objecting to the instalment order. The nature of the hearing 5 Chint's application for rescission or variation of the instalment order under Rule 37.3, UCPR is a hearing de novo and is not in the nature of an appeal from the order of the Registrar: see Cahill v Howe [1986] VR 630 at 631, Lewis v Leslie [2001] VSC 110 at [22] under the equivalent Victorian provisions. The Court has power to vary as well as to rescind the instalment order: see UCPR, Rule 37.4(4)(a) (unlike the Registrar: Rule 37.3(1)). Section 107 of the Civil Procedure Act 6 Section 107 of the Civil Procedure Act 2005 is in the following terms: Deferred payment and payment by instalments

(1) A court in which judgment has been entered may, subject to and in accordance with the uniform rules , make an order allowing for: (a) payment of the judgment debt within such time as is specified in the order, or

(b) payment of the judgment debt by instalments, payable in such amounts and at such times as are specified in the order. (2) Subject to section 119, execution of a judgment for the payment of money is stayed while the judgment is the subject of an order in force under this section.

(3) If the uniform rules so provide, the functions conferred on a Local Court by this section in relation to a judgment debt may be exercised by any Local Court , whether or not the Local Court in which the judgment was given. Part 37 of the Uniform Civil Procedure Rules 7 Part 37 of the Uniform Civil Procedure Rules 2005 is relevantly in the following terms:

37.2 Application for instalment order by judgment debtor (cf DCR Part 31A, rule 2; LCR Part 27, rule 2)

(1) A judgment debtor may apply to the court for an instalment order with respect to the amount owing under the judgment debt.

(2) Such an application: (a) may be made whether or not some other instalment order is in force in relation to the judgment debt, and

(b) must be supported by an affidavit as to the judgment debtor's financial circumstances, and

(c) must be dealt with as soon as practicable after it is made. (3) An application under this rule: (a) except as provided by paragraph (b), is to be dealt with by the registrar under rule 37.3, or

(b) if it is made during a hearing before the court, is to be dealt with by the court under rule 37.4. (4) Notice of motion of an application under this rule does not have to be filed or served if the application is made during the hearing at which the judgment debtor is being examined pursuant to an order for examination.

(5) An application under this rule may be made not only to the court in which judgment was entered but also, in the case of a judgment entered in a Local Court, to any other Local Court by which an examination is being conducted as referred to in rule 38.5 (2).

(1) The registrar may deal with an application for an instalment order: (a) by making an instalment order in relation to the amount owing under the judgment debt, or

(b) by making an order refusing the application. (2) As soon as practicable after making an instalment order under this rule, the registrar: (a) must give notice of the order to the judgment creditor and the judgment debtor, and

(b) must also give to the judgment creditor a copy of the affidavit referred to in rule 37.2 (2) (b). (3) Either party may file an objection to an order made under subrule (1) (a) or (b) at any time within 14 days after the order is made.

37.4 Instalment order made by court (cf DCR Part 31A, rule 2; LCR Part 27, rule 2) (1) This rule applies if the court is dealing with: (a) an application for an instalment order pursuant to rule 37.2 (3) (b), or

(b) an objection against an order made under rule 37.3 (1) (a) or (b). (2) On receiving the application or objection, the court: (a) must set the matter down for hearing, and

(b) must give notice of the time, date and place of the hearing to the judgment creditor and the judgment debtor, and

(c) if it has not already been done, must also give to the judgment creditor a copy of the affidavit referred to in rule 37.2 (2) (b). (3) The court may determine an application for an instalment order, or an objection against an order refusing such an application: (a) by making an instalment order in relation to the amount owing under the judgment debt, or

(b) by dismissing the application. (4) The court may determine an objection against the making of an instalment order: (a) by varying or rescinding the instalment order, or

(b) by dismissing the objection. (5) As soon as practicable after making its determination, the court must give notice of the determination, and (if it makes or varies an instalment order) of the terms of the order or the order as varied, to the judgment creditor and the judgment debtor.

37.4A Payment of instalments under instalment order

(1) Unless the court for special reasons orders otherwise, the judgment debtor must pay the amounts under an instalment order to the judgment creditor. (2) This rule does not apply to money recovered on behalf of a person under legal incapacity.

37.5 Stay of execution pending determination of application for instalment order

(1) Execution of the judgment to which an application for an instalment order relates is stayed: (a) from the time the application is made until the time the application is determined, and

(b) if the application is refused by an order under rule 37.3 (1) (b) and an objection against the order is filed under rule 37.3 (3), from the time the objection is filed until the time the objection is determined. (2) Subrule (1) does not apply if the applicant has previously made an application under this rule with respect to the same judgment debt.

37.6 Variation or rescission of instalment order on proof of improvement in judgment debtor's financial circumstances (cf DCR Part 31A, rule 3; LCR Part 27, rule 3)

(1) A judgment creditor may apply to the court for the variation or rescission of an instalment order.

(2) Such an application must be supported by an affidavit as to the judgment debtor's financial circumstances, indicating the extent to which they appear to have improved since the instalment order was made.

(3) On receiving the application, the registrar: (a) must set the matter down for hearing, and

(b) must give notice of the time, date and place of the hearing to the judgment creditor and the judgment debtor. (4) The court may determine the application: (a) by varying or rescinding the instalment order to which it relates, or

(5) As soon as practicable after making its determination, the court must give notice of the determination and, if it varies the instalment order, of the terms of the order as varied: (a) to the judgment creditor and the judgment debtor, and

(b) if the determination relates to an instalment order to which a garnishee order is subject, to the garnishee.

37.7 Effect of instalment order on judgment debt ( cf DCR Part 31A, rule 3; LCR Part 27, rule 3)

Subject to any agreement referred to in rule 37.1A, an instalment order ceases to have effect if the judgment debtor fails to comply with the order. 8 These provisions were included in the Uniform Civil Procedure Rules as part of the extensive reworking/rationalisation of the rules of all of the Courts in the State achieved by the Civil Procedure Act and Uniform Civil Procedure Rules. 9 The provisions appear to have been inherited from Victoria where the Minister's second reading speech is informative in explaining how and why the Judgment Debt Recovery Bill was passed in 1984:

"This Bill contains the most significant changes to debt recovery procedures since the introduction of wage attachment procedures in the Magistrates (Summary Proceedings) Act 1975 . The three changes which it contemplates are long overdue. They have wide community support, and the support in general, of the Australian Finance Conference and the Institute of Mercantile Agents.

The first change wrought by the Bill is the abolition of the fraud summons procedure as set out in section 5(2) (a), 16(2)(a) and 22(1)(a) of the Imprisonment of Fraudulent Debtors Act 1958 . This procedure is undoubtedly one of the most offensive and archaic debt recovery procedures in Australia. It has been the subject of numerous criticisms by a wide range of individuals and organizations, the first of the official inquiries was that of Molony committee in 1966. That committee was established by the then Attorney-General, Mr A. G. Rylah. It comprised two stipendiary magistrates, representatives of the Law Institute and of the Bar Council and a draftsman. It had been asked to report on the procedures for execution of judgments. It described the fraud summons procedure as a "clumsy and inadequate procedure". It recommended abolition of the relevant statutory provisions and the substitution of a procedure for examining judgment debtors and making instalment orders in appropriate cases.

Repeal of the relevant provisions was against supported by the Statute Law Revision Committee in its report on recovery of civil debts in 1971. It, too, recognized what the fraud summons was being used not to punish fraudulent debtors, but to obtain instalments orders against debtors who had not acted in a fraudulent manner.

Seven years later, the Australian Law Reform Commission commented at length upon the relevant procedures. It its discussion paper on debt recovery, it stated: It is intolerable for a finding of fraud to be made and for a criminal penalty to be imposed on a debtor in civil debt recovery proceedings. If fraud is alleged, the creditor should be required to make strict proof before a court constituted to try criminal offences. The present procedures do not provide the debtor against whom the fraud is alleged with proper procedural safeguards. Moreover, the debtor against whom fraud has been found is often made subject to a order for a short period of imprisonment which is suspended on condition that he pay certain instalments. In the event of default, the creditor may have him conveyed to prison without further inquiry being made concerning the reason for his default. As imprisonment may be avoided by payment of the debt, it is generally the poor and ignorant who go to gaol. A more counter-productive method of recovery debts could scarcely be devised.

The defects in the Imprisonment Fraudulent Debtors Act procedure are too numerous to list in detail. I shall refer only to the central defects. Firstly, the procedure appears to be based on fraud on the part of the debtor when, in the vast majority of cases, there is no real suggestion at all of dishonesty on his part. The fault lies not simply in the title of the Act and the forms used under it. It goes to the nature of the proceedings themselves. "Fraud" in its usual sense is simply irrelevant. It a debtor is found to have, or to have had since the judgment was entered, the means and ability to pay the debt, an order for his imprisonment may be made. His full financial circumstances need not be taken into account. The judgment debt must be paid in priority to other debts. What is in reality a civil proceeding attracts criminal penalties, penalties which apply even in the absence of fault. Mercifully, in most cases the penalty is immediately suspended on the basis that the debtor pay instalments set by the court.

Secondly, the penalty applies automatically if default is made in the payment of the set instalments. The creditor becomes entitled to a warrant of commitment. There is no inquiry as to the reasons for non-payment, including loss of job or illness. A debtor with adequate means, or with recourse to relatives and friends with those means, will normally be able to find the necessary funds, pay the debt and discharge the warrant.

A debtor without that protection is destined for gaol. It is the poor and the ignorant in society, not the fraudulent, who are at risk of imprisonment under this misnamed Act.

The Imprisonment of Fraudulent Debtors Act procedure is a clumsy means of obtaining from a court an order for payment by instalments. Perhaps the most appalling aspect of this Draconian and outdated procedure is that it is all so unnecessary. New South Wales has long abandoned imprisonment as a debt enforcement technique. Debtors still pay their debts. The credit economy survives and flourishes in New South Wales no less than in Victoria.

Some people do in fact go to gaol under the Imprisonment of Fraudulent Debtors Act . In addition, thousands of honest people annually are subject to threats of imprisonment and to the humiliation of having imprisonment orders made against them under that Act. That situation can no longer be tolerated. Fortunately, the cure is a relatively simple one.

All that needs to be done in Victoria is to put in place, as the present Bill seeks to do, a simple procedure leading to the payment of judgment debts by instalments in appropriate cases. That procedure should be available to both creditor and debtor. It need not be supported by unwarranted inferences of fraud or dishonesty, nor by automatic and quite inappropriate criminal sanctions. The court's power to punish a person for persistent and wilful default as set out in the Bill is an adequate safeguard against anyone who is tempted to disregard the court's order. Dealing with the application 10 The following submissions put to the court by Mr Leeming SC appearing for Chint are each of substance and adopted in what follows:

i. First, the evidence does not establish that Cosmoluce requires the instalment order to enable it to meet its judgment debt. Cosmoluce had a gross annual income in 2007 of $30 million. It had net assets of $2.115 million.

ii. Additionally, Cosmoluce has the benefit of an undertaking from Mr Tsagaris and his wife Mrs Vicki Tsagaris to meet any shortfall in its ability to meet its judgment debt to Chint. The existence of this undertaking is also evidenced in Cosmoluce's 2007 financial report. It was in reliance upon that undertaking that Cosmoluce's directors prepared the 2007 financial report on the basis that it was a going concern.

iii. When Mr Tsagaris says that "Cosmoluce does not have sufficient assets or expected future income to meet the judgment debt" it is clear that he is overlooking Cosmoluce's asset consisting of his and Mrs Tsagaris' undertaking to pay any shortfall in Cosmoluce's ability to meet its judgment debt to Chint.

iv. Secondly, there is no basis to conclude that Mr Tsagaris and Mrs Tsagaris do not have the capacity to discharge their undertaking to Cosmoluce to meet its judgment debt to Chint. Mr Tsagaris does not assert that in his affidavit. While the financial circumstances of Mr Tsagaris and Mrs Tsagaris are not fully disclosed in the evidence, it is clear that Mr Tsagaris and Mrs Tsagaris have substantial assets as follows.

(a) Individually or between them Mr Tsagaris and Mrs Tsagaris are the registered proprietors of five properties: 1546 Canterbury Road Punchbowl, 14 Drapers Road Colo Vale, 105 - 109 Anzac Parade Kensington, 30 Cantrill Avenue Maroubra and 30 Majors Creek Araluen. While Mr Tsagaris says that those properties are subject to mortgages, he does not disclose the remaining equity in the properties.

(b) Mr Tsagaris and Mrs Tsagaris own shares in twelve companies in addition to Cosmoluce. Those companies are: Cosmo Lighting Australia Pty Limited, Caypack Pty Limited, Rosamist Pty Limited, Terahill Pty Limited, Teracal Pty Limited, Australuce Pty Limited, Dunver Pty Limited, Colepine Pty Limited, Kaliness Pty Limited, Cosmo Lighting Baulkham Hills Pty Limited, Oz Christmas Hampers (Aust) Pty Limited and Solar Australasia Pty Limited. Mr Tsagaris does not disclose his or his wife's ownership of shares in those companies (other than Dunver Pty Limited) in his affidavit or provide any estimate of the value of those shares. However, it is clear that Terahill Pty Limited owns property at 62 Marigold Street, Revesby and Colepine Pty Limited as trustee for the Tsagaris Family Trust owns property at 28 Barnett Place, Ashmore in Queensland. v. Thirdly, despite their apparently substantial assets and their undertaking to Cosmoluce, Mr Tsagaris does not disclose any intention on his or his wife's part to use any of their assets to enable Cosmoluce to pay its judgment debt to Chint.

vi. Fourthly, far from being arranged around the proposed sale of any assets by Mr Tsagaris and Mrs Tsagaris for the purposes of satisfying their undertaking to Cosmoluce to meet its judgment debt to Chint, the payment plan provided for in the instalment order appears designed to enable Cosmoluce to meet those payments without calling on Mr Tsagaris and Mrs Tsagaris honour that undertaking. This conclusion arises from the following matters.

(a) For the 2007 financial year Cosmoluce's net profit was $700,000 which, divided by 12, is $58,333.33. It would appear, therefore, that Cosmoluce intends to meet the 23 instalment payments of $50,000 from its monthly net profits.

(b) The proposed instalment payment of $3.833 million in March 2009 is to be sourced from the proceeds of a sale by a company called Kenthill Pty Limited of a property at 112 - 124 Anzac Parade, Kensington to a Pitt Development Pty Limited - a company with a paid up share capital of $2 - for $7.35 million. Mr Tsagaris, together with other family members, owns an indirect interest in Kenthill Pty Limited. The exchange of contracts for the sale of that property occurred in March 2008, prior to the trial of these proceedings. The contract of sale has, somewhat unusually, a 10 month completion period. Mr Tsagaris has given no explanation for the extended completion period for the contract of sale for the property at 112 - 124 Anzac Parade, Kensington. Furthermore the evidence includes the fact that Macquarie Bank has given a bank guarantee on behalf of the purchaser limited to only $150,000 which is substantially less than the whole of the deposit.

(c) It is unclear from where the final instalment payment of $897,028 in July 2010 is intended to derive. However, Mr Tsagaris does not say that that instalment payment will be made by the disposal of any assets by him or his wife.

vii. Fifthly, it is an available inference from the four matters above that the purpose and effect of Cosmoluce seeking and obtaining the instalment order is not to give Cosmoluce time to enable it to meet its judgment debt to Chint from all of its available resources, but to enable Cosmoluce to meet its judgment debt to Chint without calling on Mr Tsagaris and Mrs Tsagaris' undertaking to meet that judgment. In other words, the purpose and effect of the instalment order is to allow Cosmoluce to meet its judgment debt to Chint without using the one asset Cosmoluce has which is for that very purpose.

viii. That is not a proper basis to obtain an instalment order under section 107, Civil Procedure Act 2005 and Rule 37.2 UCPR.

ix. Sixthly, Chint is significantly prejudiced by the instalment order. This prejudice arises as follows.

(a) After the judgment of 27 June 2008 but before the instalment order, Chint had a judgment debt of $5.33 million that it could and, by the issue of a statutory demand on 10 July 2008, did move to immediately enforce against Cosmoluce. Cosmoluce, through its own assets and the assets of Mr Tsagaris and Mrs Tsagaris available to it by reason of their undertaking, has an apparent capacity to meet that judgment debt. If the judgment debt was not paid by Cosmoluce by reason of the failure of Mr Tsagaris and Mrs Tsagaris to honour their undertaking to the company, Chint could and would have quickly proceeded to appoint a liquidator to Cosmoluce who, one would expect, would have caused the company to enforce the undertaking against Mr Tsagaris and Mrs Tsagaris. Through this process Chint would likely have relatively quickly recovered the whole of its judgment debt.

(b) Following the instalment order and the consequent setting aside of Chint's statutory demand, Chint's full recovery of its judgment debt is delayed for two years, dependent on instalment payments sourced (apparently) from Cosmoluce's profits and the proceeds of an unusual multi-million contract of sale of property to a $2 company whose credit worthiness is unknown to Chint. Two years is a long time and notwithstanding that there is no specific evidence that Cosmoluce will not necessarily continue on with its business activities at the end of that period, Chint should not be placed in a position where it is dependant upon the vagaries of commercial competition. Further and even if there is no evidence presently suggestive of this possibility, Chint should not be in a situation in which Mr Tsagaris and Mrs Tsagaris could conceivably determine to deal with their assets such as to put them beyond the reach of Chint.

x. Accordingly, Chint has been materially prejudiced by the instalment order. 11 Additionally, it should be noted that insofar as Mr and Tsagaris have undertaken to Cosmoluce to satisfy the judgment debt on behalf of Cosmoluce, Chint has twice endeavoured to make clear that it would agree to the payment plan proposed by Cosmoluce provided that:

(a) Mr and Mrs Tsagaris (jointly and severally) personally guarantee the payment of the instalments; and

(b) Cosmoluce or Mr and Mrs Tsagaris grant or procure the grant of a first ranking mortgage over property in New South Wales in favour of Chint to secure Cosmoluce's obligation to pay the instalment of $3,833,000 .00 11 March 2009. [letter of 31 July 2008] [see also the later letter of 4 September 2008] 12 These proposals have not been accepted. 13 Yet a further problem exposed by Mr Miller of counsel appearing for the defendant, seemed to be a prevarication in relation to the so-called 'undertaking' by Mr and Mrs Tsagaris. This proposition was to contrapose:

i. Paragraph 5 of the of the affidavit of Mr Tsagaris of 28 July verifying the notice of motion dealt with by the registrar and deposing that he and his wife had undertaken to Cosmoluce to satisfy the judgment debt on behalf of Cosmoluce and

ii. Paragraph 1 [of the Cosmoluce notes to the financial statements for the year ended 30 June 2007] which had included the words: "In the event that a material liability arises, to directors have undertaken to financially support the company to the extent of any such shortfall in the ability to fund a final settlement or judgement (plus associated costs) in this matter]. 14 Mr Miller's proposition was that it was not open to Chint to contend that the relevant undertaking was to pay the judgment debt immediately upon it becoming due and payable but that all that they had done was to undertake to financially support the company and to fund a settlement of the judgment debt. This approach hardly gives the Court room for optimism in relation to the parameters of such undertaking as is said to be on foot. Standing back from the detail 15 It is trite to observe that the principled exercise of the relevant discretion requires that the particular circumstances which obtain in relation to any application for leave to pay a judgment debt in instalments be determined upon the particular facts. However it seems to me fair to observe that:

i. Substantial commercial litigation stands a far distance from the fraud summons world earlier referred to;

ii. Companies are placed into liquidation regularly: often that circumstance arising from contested litigation;

iii. Prima facie a party having succeeded in obtaining substantial success in major commercial litigation is obviously entitled to the fruits of its success;

iv. The fact that the losing party continues to run a substantial business [and that the winning party has no such business] cannot per se, affect the prima facie entitlement of the winning party to enforce the Courts order;

v. Some particularly special circumstance would have to be shown to deny a party to major commercial litigation, its entitlement to enforce a court order; vi. No such circumstances have been here demonstrated; Short minutes 16 The parties are to bring in short minutes of order.

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