Discobell Pty Ltd v Franky Jay Pty Ltd

Judgment

1. There are four motions before the Court. They are:

• The defendants' application under s 5(1) of the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth) that the proceedings in this Court be transferred to the Family Court;
• The defendants' application that the plaintiffs provide security for costs;
• The plaintiffs' application that a subpoena issued to "The Commissioner, NSW Police Force" be set aside; and
• The plaintiffs' application that the ninth defendant's Cross-Summons be heard and determined separately and before any other questions in this proceeding.

1. The parties are agreed as to the outcome of the application to set aside the subpoena. The documents have been produced to the Court. No order for access or inspection has been sought or made. It is accepted that the documents produced may become relevant at a later stage of the proceedings. It is agreed, and I will order, that the motion be stood over with liberty to either party to apply on two days' notice. It is also agreed there should be no order as to the costs of this motion.
2. In order to deal with the remaining three motions, it is necessary to summarise briefly the claims made in these proceedings and in the Family Court.

These proceedings and the Family Court proceedings

1. Each of the plaintiffs is trustee of a trust which undertakes investment activities. The first to sixth defendants are corporations that own or carry on restaurant businesses at Woolloomooloo, Manly and Castle Hill. The seventh and eighth defendants are holding companies of those companies and the ninth defendant (Frank Criniti) is said to be the ultimate beneficial owner and sole director of each of those companies.
2. In July 2014, the plaintiffs commenced proceedings in this Court (the First Proceedings) against the defendants to recover monies said to have been advanced by the plaintiffs to the first to sixth defendants between 14 November 2011 and 17 June 2013. The amounts advanced totalled $3,900,523. It was claimed those payments were originally made in return for promised shareholding interests in the first to sixth defendants; that the defendants failed to honour those arrangements; that in January 2014 it was agreed that the monies invested would be "converted to loans" and repaid with interest; and that Frank Criniti and the seventh and eighth defendants agreed to guarantee repayment of those loans. A payment of $1 million was made to the plaintiffs in July 2014.
3. On about 30 October 2014, the First Proceedings were resolved by the execution of a deed of settlement (the Settlement Deed) by which Frank Criniti promised to pay the plaintiffs $3,376,000 by instalments. The first instalment of $1 million was paid on 30 October 2014.
4. No further payments have been made and in the current proceedings, the plaintiffs claim the balance of the monies due under the Settlement Deed. In the alternative, they claim the monies due under the loan and guarantee agreements. This alternative claim is made on the basis that the Settlement Deed is void and unenforceable (as the defendants contend).
5. The defendants allege that the Settlement Deed was executed under duress (practised on Frank Criniti by persons who included a Mr Tukel); that they made the two payments of $1 million (one preceding and one upon execution of the Settlement Deed) by reason of that duress; and that none of the payments by the plaintiffs to or for the benefit of one or more of the first to sixth defendants was made by way of loan.
6. Frank Criniti has also filed a Cross-Summons seeking a declaration that the Settlement Deed was validly rescinded and recovery of the two payments of $1 million.
7. The Family Court proceedings were commenced on 4 March 2015 by Frank Criniti's wife, Rima Criniti, from whom he was separated in January 2015. Property and parenting orders are sought. The property orders include that Rima Criniti receive "65[%] of the total value of the assets of the parties as found by the Court". In his response filed in July 2015, Frank Criniti proposes an order that he pay a sum equal to "the value of 50% of the net matrimonial assets".
8. In May 2015, the Commissioner of Taxation sought leave to intervene in the Family Court proceedings. He did so in support of an order that any final property settlement between the parties "take into account the taxation liabilities of the husband" and "make provision for the payment of [his] taxation liabilities" to the Commissioner. Notices of amended assessment were issued to Frank Criniti in January 2015 for the taxation years ended 30 June 2011 to 30 June 2013. Each of those assessments, including penalties, is for a significant amount.
9. I will deal first with the defendants' motions and then the remaining motion of the plaintiffs.

Defendants' application to transfer these proceedings to the Family Court

1. The Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth) relevantly provides that, where it appears to this Court it is "otherwise in the interests of justice" that a proceeding pending in this Court be determined by the Family Court, the Court "shall transfer" that proceeding to the Family Court: s 5(1).
2. In BHP Billiton Limited v Schultz [2004] HCA 61; 221 CLR 400 at [14], the majority said of this provision: … If it appears to [the] court that it is in the interests of justice that the proceedings be determined by another designated court, then the first court "shall transfer" the proceedings to that other court. There is a statutory requirement to exercise the power of transfer whenever it appears that it is in the interests of justice that it should be exercised. It is not necessary that it should appear that the first court is a "clearly inappropriate" forum. It is both necessary and sufficient that, in the interests of justice, the second court is more appropriate.
3. As McKerracher J observed in Federal Commissioner of Taxation v Residence Riverside Pty Ltd [2013] FCA 720; 95 ATR 86 at [17], the factors to which regard should be had when considering the interests of justice include the commonality or diversity of the parties; the commonality or diversity of the issues; the nature of the proceedings in each court; the risk of conflicting findings of fact or orders if the proceedings are not determined in the one court; the stage of the proceedings in the respective courts; and an assessment of whether the issues in the proceedings might be more cheaply, expeditiously and efficiently determined in one court rather than the other.
4. Taking account of those factors, it is not, in my view, in the interests of justice that this proceeding be determined by the Family Court rather than by this Court.
5. The issues in this Court arise with respect to commercial dealings between the plaintiffs and the defendants. Ultimately those issues are, on the plaintiffs' primary case, whether Frank Criniti is liable under the Settlement Deed and on their alternative case, whether the first to sixth defendants as borrowers, and the remaining defendants as guarantors, are liable for the repayment of various amounts said to constitute loans. Neither Rima Criniti nor the Commissioner of Taxation is a proper or necessary party to the resolution of those issues. Each was made aware of the present application and neither has indicated any interest in being involved in the determination of those issues.
6. The plaintiffs are not parties to the Family Court proceedings and to the extent that any of the defendant companies are parties to those proceedings, they are so because they are beneficially owned or controlled by the husband, Frank Criniti. As such, their joinder in the Family Court proceedings was not for the purpose of resolving any issue in those proceedings which is common to the proceedings in this Court.
7. It may be accepted that the resolution of the issues in this Court will have relevance to the broader questions arising in the Family Court proceedings, which relate to the nature and extent of the assets and liabilities of the parties and their value. However, those issues remain discrete and must be determined before the questions which arise in the Family Court can be addressed.
8. The proceedings in this Court are likely to be dealt with efficiently and expeditiously, having regard to the fact that they are to be dealt with in a specialist list with procedures directed to achieving those objectives. They are not proceedings that would ordinarily be determined in the Family Court. In this Court, they have advanced to the stage where directions can be given for the filing of evidence. In the ordinary course, the matter might be listed for hearing later this year or early in the new year. The position is not likely to be the same in the Family Court. The proceedings in that Court have not advanced to the stage where any issues concerning the assets of the parties have been formulated. The evidence also suggests that there would be a significant delay (at least 18 months) in that Court between the fixing of a hearing date and the time of its commencement.
9. In summary, the subject matter of the proceedings and the issues they raises concern matters within the area of speciality of this Court. The plaintiffs are not parties to the Family Court proceedings and the same issues do not arise in those proceedings. The issues which arise in this Court are discrete and logically precede the resolution of the more general issues likely to arise in the Family Court. That being so, there is not likely to be any duplication of costs or resources of the parties if the proceedings are determined separately. Nor is there a likely risk of conflicting findings of fact or the making of inconsistent orders.
10. Finally, I should deal with three specific arguments made by the defendants as to why it is in the interests of justice that these proceedings be determined by the Family Court. First, it is said that the business and affairs of Frank and Rima Criniti are complex and that one Court should assume "management of the matter at large" so as to avoid any duplication and the risk of inconsistent findings. Exactly what that complexity is and how any risk of duplication or inconsistent findings arises is not explained or obvious. Secondly, it is said that because of orders made in the Family Court in relation to dealings with possible matrimonial assets, Frank Criniti could not satisfy by payment any judgment obtained in this Court. That may be so. However, it does not follow that it is in the interests of justice that the discrete questions arising out of the commercial dealings of the parties to these proceedings should be determined in the Family Court.
11. Thirdly, it is said that Frank Criniti is not in a position to compromise the present proceedings because the Commissioner of Taxation and Rima Criniti have a right to be heard on the issues raised by the plaintiffs' claim. It is not clear what "right" is being referred to. As I have already noted, each of those parties was advised of the application to transfer the proceedings. Neither sought leave to appear in support of it. There is no evidence providing any insight as to where Rima Criniti's interests lie in relation to the different possible outcomes of the plaintiffs' claims. The Commissioner's interest, having regard to the basis upon which he has intervened in the Family Court proceedings, is in relation to the final property settlement or orders made and the provision for payment of Mr Criniti's taxation liability.
12. The defendants' application to transfer these proceedings to the Family Court should be dismissed with costs.

Defendants' application for security for costs

1. The defendants seek security for costs under Uniform Civil Procedure Rules 2005 (NSW), r 42.21 and under s 1335 of the Corporations Act 2001 (Cth). On either basis, the defendants must show that there is reason to believe that the plaintiff corporations will be unable to pay the costs of the defendants, if they are successful in their defence.
2. Each of the plaintiffs has a paid up capital of $10. Neither has any registered interests in land in New South Wales. It is accepted that each is the trustee of a discretionary or unit trust. Neither plaintiff produced financial statements or other records following a request by the defendants' solicitors that it do so. Eventually, in response to a notice to produce, the second plaintiff produced a balance sheet as at 30 June 2015 for the Planet High Unit Trust. That balance sheet shows that the Trust has net assets of $1.69 million consisting of a loan receivable and its holdings of interests in other unspecified unit trusts.
3. That being the evidence, I am satisfied that there is reason to believe that each plaintiff will be unable to pay the costs of the defendants if ordered to do so. The reason is that the assets of each plaintiff are held on trust so that in the case of each its ability to satisfy any costs order in favour of the defendants depends on its right to be indemnified out of the assets which it holds as trustee. As Smithers J observed in Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd [1985] ATPR 40-584 at 46,729, in such circumstances "unless some step is taken to alleviate [the difficulties which a successful respondent would face in attempting to execute an order for costs] it is reasonable and just to treat the applicant company as if it were without assets to meet such a liability". See also In the matter of Eastmark Holdings Pty Ltd (receivers and managers appointed) and 1 Denison Street Holdings Pty Ltd (receivers and managers appointed) [2015] NSWSC 2071 at [3]-[4] (Brereton J).
4. No undertaking or acknowledgement has been proffered, either by the plaintiffs or the unit holders or beneficiaries of the relevant trusts, that the companies are able to have recourse to the assets they hold on trust to satisfy any adverse costs order: cf Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 at [10]. That being the position, notwithstanding the value of the assets held in the Planet High Unit Trust, there remains reason to believe that each plaintiff will be unable to pay the costs of the defendants if they are successful.
5. Accepting that the power to order security is enlivened, the plaintiffs nevertheless contend that no order should be made for two reasons. First, it is submitted that they are effectively in the position of defendants in relation to their claim because Frank Criniti's Cross-Summons, which seeks to set the Settlement Deed aside, is "clearly offensive in nature" as it also seeks to recover the payments totalling $2 million.
6. I do not agree with that characterisation of the plaintiffs' position. Their claim is brought to enforce the Settlement Deed in circumstances where earlier proceedings, in which they also were plaintiffs, had been compromised. In the event that the Settlement Deed is set aside, they maintain in the current proceedings their claims that there were oral agreements by which the advances were agreed to be loans. The defendants respond that the Settlement Deed is voidable and that there were no such agreements. The Cross-Summons arises out of this response. The only aspect of it which involves a substantive claim by the defendants is for the recovery of the two payments of $1 million. That outcome, at least in relation to the second payment, follows from success on their principal argument as to duress, which is primarily raised by way of defence to the plaintiffs' claim.
7. Secondly, it is submitted that the plaintiffs' claim under the Settlement Deed has good prospects of success, and for that reason, that there is no need for security to cover the unlikely event that they fail. Ordinarily, in an application for security, the respective strengths of the cases of the parties are not considered beyond an evaluation of whether the claims and defences or counter-claims are made in good faith and arguable. In this case, the plaintiffs point out that the defendants admit that they received monies and do not provide a satisfactory explanation as to why, if the monies were paid by way of investment rather than loan, no shares were ever issued at the outset; and that the defendants made two payments consistent with there having been a loan at some stage. By way of response, the defendants maintain that the original agreement was that a Mr Cassaniti, or entities controlled by him, would invest in the three restaurant businesses, that this arrangement did not proceed and that it's not having done so did not result in there being any liability to the plaintiffs. In relation to the two payments, they maintain that they were made under duress. Notwithstanding these matters, the position remains that the duress defence cannot be dismissed as without any reasonable foundation, so that there is a prospect that the plaintiffs' principal claim might fail.
8. The plaintiffs do not point to any other circumstance that might be weighed in the balance against the making of an order for security. The fact that the Planet High Unit Trust has net assets in excess of $1.5 million is not such a circumstance in the absence of an undertaking or acknowledgment that the trustee could have recourse to those assets to satisfy any costs order.
9. Mr Garvin, an experienced commercial litigation solicitor, estimates the costs and disbursements of defending the plaintiffs' claim, assessed on the ordinary basis, at approximately $130,000. His opinion has not been answered by any evidence on behalf of the plaintiffs. However, the plaintiffs do suggest, if security is to be provided, that it occur in two stages, with 50% to be provided now and 50% to be provided upon the proceedings being fixed for hearing. A similar order was made by Brereton J in Street v Luna Park Sydney Pty Ltd at [42]. As there is no reason why the whole of the security should be provided at this time, I agree with that suggestion. Accordingly, I propose to order security in the amount of $130,000, payable on that basis.

Plaintiffs' application for separate determination of the Cross-Summons

1. The plaintiffs seek an order that the issues raised by the Cross-Summons be determined separately and before the other issues in the proceedings. That application is opposed. It is also contended that the Court should not hear the application at this stage because all of the persons who may be affected by the order (those persons not being limited to the nine defendants) have not been joined as parties to the motion or given the opportunity to be heard on its outcome.
2. In my view, this application must be dismissed because it is too early to determine whether there should be a separate determination of the Cross-Summons. The plaintiffs' response to the Cross-Summons has not been filed. Until the issues are joined and the parties are able to indicate the evidence to be relied on, an assessment cannot be made as to whether there are factual issues or issues as to the credit of particular witnesses which arise in the underlying proceedings as well as in the Cross-Summons. For example, Frank Criniti's credit is likely to be in issue in relation to his allegations as to duress, as well as to the question whether the earlier oral loan agreements alleged by the plaintiffs were made. In addition, the credit of Mr Tukel and Mr Khahil, who may be witnesses called in relation to the duress issue, is also likely to be in issue with respect to any evidence they give as to the circumstances in which the original advances and the alleged subsequent agreements were made.
3. As Giles CJ at CL observed in Tallglen Pty Ltd v Pay TV Holdings Pty Ltd (1996) 22 ACSR 130 at 142 in relation to orders for the determination of separate questions: It is often the case that the need to make findings of fact for a decision of the separate question, especially findings which may involve issues of credit, tells strongly against the making of an order because related facts, and renewed issues of credit, will or may arise at a later stage in the proceedings. Experience teaches that it should be able to be seen with clarity that decision of a separate question will be beneficial in the conduct of the proceedings and the resolution of the parties' dispute.
4. Until the issues are clarified, and the witnesses likely to be called in relation to them identified, it is not appropriate to make any order for separate determination. Accordingly, this application should be dismissed.

Conclusion

1. I make the following orders:
2. Order the plaintiffs' motion dated 12 February 2016 (to set aside the subpoena) be stood over with liberty to either party to apply on two days' notice.
3. No order as to the costs of the motion in order 1.
4. Order the plaintiffs' motion dated 6 April 2016 (for a separate determination of the Cross-Summons) be dismissed.
5. Order the plaintiffs pay the defendants' costs of the motion in order 3.
6. Order the defendants' motion dated 31 March 2016 (for transfer to the Family Court) be dismissed.
7. Order the defendants pay the plaintiffs' costs of the motion in order 5.
8. Order in relation to the defendants' motion dated 11 December 2015 (for security for costs): (a) that the plaintiffs give security for the costs of the defendants in a form acceptable to the Registrar as follows: (i) in the sum of $65,000 within 28 days of the date of these orders; and (ii) in the sum of $65,000 no less than 28 days prior to the date fixed for hearing. (b) order that, if security is not given in accordance with order 7(a), the proceedings be stayed.
9. Order the plaintiffs pay the defendants' costs of the motion in order 7.

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