Garawin Pty Ltd v 1A Eden Pty Ltd

Events Since the First Judgment and the Issues for Determination

1. In Order (6) of the first judgment the Court ordered the parties to convene a meeting of the directions of the trustee, 1A Eden, under the March 2013 deed to make provision for the external liabilities of 1A Eden in accordance with clause 8.3 of the March 2013 deed.
2. 1A Eden convened a directors meeting but it did not resolve upon a consensus for the distribution of assets. After further directions hearings the Court therefore ordered the parties to put on submissions in relation to the final relief to be granted under Real Property Act 1900, s 74MA(2)(b). Each of Garawin, on the one side, and Zaarour investments, Joesandra and Mr Zaarour put on submissions in November 2022 in conformity with the Court's directions.
3. The moulding of final relief required the parties to address how 1A Eden should make appropriate provision for the future and contingent liabilities of the Trust and to work out a regime for the equitable and partial distribution of the property of the Trust once an appropriate reserve had been set.
4. The parties' exchanges of evidence and submissions ultimately revealed a substantial consensus of opinion about the course to be taken, both in relation to the setting reserves and the distribution of assets.
5. But in December 2022 the Owners Corporation, the plaintiff in the defect proceedings, gave notice that it wished to be heard on what was an appropriate reserve to provide for the Trust's future and contingent liabilities. The Court directed that if the Owners Corporation wished to be heard on this issue that it should apply by motion and affidavit to do so, a course which it adopted, as is described above.
6. The Owners Corporation's motion sought an order that the capital of 1A Eden be preserved in an amount of no less than $3.5 million to meet prospective liabilities. Alternatively, the Owners Corporation's motion sought a stay on any grant of liberty to the parties in these proceedings to distribute funds from the Trust to permit the Owners Corporation sufficient time to apply for freezing orders in the defect proceedings.
7. 1A Eden has traded only minimally since the partial distribution of assets from the Trust. Since 1 November 2018 1A Eden has maintained a single cheque account which incurs nominal bank fees and excess interest charges. 1A Eden's current liabilities are limited to the ongoing legal costs incurred in defending the defect proceedings. The parties appear to have co-operated in meeting other expenses such as land tax, Council rates and other land charges in respect of the land still held in 1A Eden's name.
8. During the principal hearing in May 2021, the Owners Corporation provided correspondence to the Court alleging that current and additional defects and repair work alleged in the defect proceedings required anticipated expenditure in the range of $1.6 to $2.8 million.
9. Since the first judgment the Owners Corporation served an expert report by a building and construction expert Mr David Madden, dated 10 May 2022 ("the Madden report"). In summary, the Madden report alleged defects in a total amount of $2.87 million inclusive of GST, rounded to two decimal places. At the same time the Owners Corporation informed the parties to these proceedings that it estimated its total anticipated future liabilities to be $3.50 million, inclusive of GST. The Owners Corporation claimed that a figure of $3.50 million was comprised of $2.84 million for the rectification costs and $0.67million for legal costs (allowing for a slight rounding error).
10. In July and August 2022 Mr Sleiman, Mr Zaarour and Mr Moore filed affidavits disputing the Owners Corporation's claim.
11. The affidavit evidence of Mr Sleiman and Mr Zaarour and Mr Moore heavily criticising the Madden report comes from experienced builders and developers. But a degree of self interest on their part in minimising the liability of 1A Eden causes the Court to be cautious in assessing their evidence. Notwithstanding that, their evidence would justify the conclusion that 1A Eden is only likely to face a liability to the Owners Corporation of well under $1 million. And a recent report of January 2023 from the Court appointed expert, Mr Michael Sturgess, would justify the conclusion that 1A Eden's liability is closer to $187,000 and on its best case the Owners Corporation can claim no more than $800,000.
12. The contest between the parties to these proceedings is dealt with before the Owner Corporation's motion.

The Parties' Submissions

1. The parties' submissions define the remaining issues. They do not greatly differ and are accepted by the Court on both sides, as is explained below.
2. Garawin accepts that Australian accounting standard AASB 137 is an appropriate standard to guide the decision making of a trustee to make provision for the contingent liability faced by 1A Eden in the defect proceedings. The Court had previously raised with the parties whether AASB 137 was applicable to 1A Eden's consideration under clause 8.3.
3. Accounting standard AASB 137 "Provisions, Contingent Liabilities and Contingent Assets", defines a "contingent liability" as follows: "(a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or (b) a present obligation that arises from past events but is not recognised because: (i) it is not probably that an overflow of resources embodying economic benefits will be required to settle the obligation; or (ii) the amount of the obligation cannot be measured with sufficient reliability."
4. Garawin does not contest that the liability 1A Eden faces in the defect proceedings is "a present obligation that arises from past events" that should be provisioned. There are no other present obligations of 1A Eden that should be provisioned.
5. The question then is assessing the amount of the provision to be made. The plaintiff submits that the starting point for assessing the amount of security is the definition of "present obligation", which is defined in AASB 137 as "the best estimate of the expenditure required to settle the present obligation at the end of the reporting period": AASB 137 (36).
6. Reaching the best estimate of that expenditure is further explained in AASB 137 (37) as follows: "37. The best estimate of the expenditure required to settle the present obligation is the amount that an entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time. It will often be impossible or prohibitively expensive to settle or transfer an obligation at the end of the reporting period. However, the estimate of the amount that an entity would rationally pay to settle or transfer the obligation gives the best estimate of the expenditure required to settle the present obligation at the end of the reporting period."
7. Garawin submits that the expenditure required to settle this "present obligation" represented by 1A Eden's liability in the defect proceedings should be assessed by reference to the amount it would "rationally pay to settle the obligation at the end of the reporting period, or to transfer it to a third party". The Court agrees that this is the method that should be adopted.
8. Garawin says an appropriate amount for this provision is $3 million. It proposes that this provision amount, represented by the following assets, can be retained by 1A Eden. Garawin's initially proposed retentions are as follows: 1. Lot 27, which is already held as security in the defect proceedings and is currently valued at $1.4 million; 2. A construction loan is to be taken out by 1A Eden in the amount of $800,000 to fix the balance of the defects and Lot 6 be used as security for the loan currently valued at $1.55 million; and 3. Lot 1 is to be retained as security, which has a current value of $750,000.
9. Garawin submits that if this proposal is acceptable to the Court that the parties have otherwise agreed to the distribution of the remaining properties from 1A Eden and the Court can now lift the stay in Order (8) of the orders made on 25 March 2022 and make Order (2), varied, so as to delete sub-paragraphs (2) (b), (d) and (e).
10. The defendants' submissions point to the affidavits of Mr Zaarour and Mr Sleiman that set out the shortcomings in the Madden report and submit that the Owners Corporation have grossly overestimated the amount of rectification costs for which 1A Eden is liable.
11. The defendants further point out that the Owners Corporation's claim is dependent not upon the Court appointed expert, Mr Sturgess, but upon a separate report commissioned by the Owners Corporation that has failed to take into account much of the rectification work already performed by Cubic, and covered by the Court appointed expert in his report.
12. The defendants' submissions accept the application of AASB 137. The defendants submit that, based on that evidence, the best estimate of expenditure on remaining rectification works in the defect proceedings is a much lower figure in the order of $100,000. The defendants submit that the evidence of Mr Zaarour and Mr Sleiman has taken issue in detail with what they say are significant deficiencies in and gross overestimates of the Owners Corporation's claim for rectification costs in the defect proceedings.
13. The defendants submit that there is now consensus among the directors of 1A Eden that the works required in the defect proceedings will be completed and funded from the retained assets in 1A Eden and that such rectification works will be performed by or as directed by Mr Zaarour and Mr Sleiman.
14. In summary, the defendants say that all the directors have now proposed sufficient security that well exceeds what are the "carefully assessed contingent liabilities" of 1A Eden, which split evenly would require $1.5 million from the Moore interest and $1.5 million from the Sleiman and Zaarour interests.
15. In [17] to [19] of their written submissions the defendants structure their primary submission as follows: "17. Currently, Lot 27 remains registered in the name of 1A Eden although is notionally a Zaarour interest. It has an unencumbered value of $1,400,000 and is the security by order of the Court in the rectification proceedings. Also, Lot 6 remains registered in the name of 1A Eden whilst notionally a Moore / Garawin interest. It has a value of approximately $1,550,000. Combined, this provides clear security of in excess of $3,000,000. 18. It has been indicated that the intention is to raise capital for works by way of a construction loan and this may be achieved over Lot 6. Again, this method is agreed by all parties. At the conclusion of the further works, an adjustment as to the distribution between the respective interests will be able to be made as to the net assets remaining to be distributed or accounted for as between the parties will be achieved. 19. On this basis, the orders necessary would simply be: (a) Lot 27 be retained in 1A Eden Pty Ltd, in accordance with and subject to the orders of the Court; (b) Lot 6 be retained in 1A Eden (with the ability for such to be used as security for the purpose of obtaining such construction loan or other facility as may be required to complete rectification works); (c) Such other lots be permitted to be transferred to and accounted for to the respective interests that were granted to them pursuant to the Distribution Agreement."
16. This differs from Garawin's proposal by not including the extra value of Lot 1 of $750,000 as part of the overall assets to be retained to support the provision. It is otherwise the same as Garawin's proposal.
17. The defendants put forward an alternative proposal. They submit that if the Court were of the view that a higher level of provision, and retention of assets was warranted, then (a) Joesandra could provide a charge over Lot 1 in favour of 1A Eden as security for any additional liabilities of 1A Eden; and (b) the parties would jointly guarantee a loan to taken out by 1A Eden to provide funds for the defect rectifications.
18. In submissions in reply Garawin accepted the submissions of the defendants that an appropriate provision would be by the way of the mechanism propounded in paragraph [19] of the defendant's submissions: under this mechanism Lot 27 and Lot 6 will be retained in 1A Eden and other lots can be transferred and accounted for to the respective interests granted to them pursuant to the distribution agreement that the Court has found was made among them in the first judgment. Garawin submits in reply that this mechanism has the effect of provisioning approximately $3 million in security, which Garawin submits is sufficient given the untested nature of the Owners Corporation's claims.

Consideration.

1. Accounting Standard AASB 137 sets the appropriate standard by which the trustee, 1A Eden should provide reserves for the future and contingent liabilities the Trust. A discussion of 1A Eden's accounting obligations in relation to the Trust appears in the first judgment (at [27] and [28]). These include preparing accounts in "a proper and efficient manner" (clause 8.1) keep proper books of account (clause 8.4) and providing reserves for future and contingent liabilities (clause 8.3). These clauses imply that accepted accounting principles and Australian accounting standards should be applied when 1A Eden provides reserves for contingent liabilities.
2. The Court accepts that the combined evidence of Mr Moore, Mr Zaarour and Mr Sleiman that there is very substantial room for debate with the quantum of the claims made by the Owners Corporation and that setting aside a reserve of $3 million to meet the Owners Corporation liabilities is appropriate in the present case. The assessment of this figure has been reached personally by each of the directors. It is a rational provision. It is based upon sworn expert evidence of the directors and the expert evidence of Mr Burgess that justifies a much lower figure than the Owners Corporation's claim. It represents a reasonable judgment as to an amount for which that claim could be settled. Indeed, if anything it perhaps errs on the side of generosity. The figure of $3 million reflects the essential reasoning of AASB 137.
3. AASB 137 does not require provision to be made for the maximum amount claimed by an external contingent creditor. But it should be an amount which in the judgment of the accounting entity is rationally justifiable as a basis for settlement. And of course, the making of such a provision does not preclude 1A Eden striving to conclude the defect proceedings so they result in a much lower liability for 1A Eden than the provision.
4. Accordingly, subject to the question of the appearance of the Owners Corporation that is the course the Court will take. The Court accepts the consensus position reached by the directors and reflected in Garawin's reply submissions of a $3 million provision. The Court will authorise the further performance of their agreement in accordance with that consensus. The retention of Lots 6 and 27 by 1A Eden represents value very close to $3 million and their retention will be sufficient without Lot 1.

The Submissions of the Owners Corporation and Costs

1. The Owners Corporation claims a right to be heard on the present issue. Both the Garawin interests and the Zaarour and Sleiman interests all submit that the Owners Corporation has no right to be heard because it has no justiciable claim in these proceedings and is a stranger to them: cf Deloughery v Watson [2010] NSWCA 148 and Bauer Media Pty Ltd v Wilson [2018] VSCA 68.
2. The Court does not have to decide this question. There is a more efficient and less contentious way of dealing with the Owners Corporation's motion. The Owners corporation's interest can be protected without the Owners Corporation being heard on the grant of final relief in these proceedings as is sought by prayer for relief (1) of the Owners Corporation's motion. The Owners Corporation alternative claim for relief was for a freezing order in the defect proceedings.
3. The Court will adjourn the Owners Corporation's motion into the Technology and Construction List for determination there if the Owners Corporation are dissatisfied with the Court's grant of final relief in these proceedings. But if the Owners Corporation is satisfied with the grant of final relief in these proceedings then its motion can be dismissed. The Owners Corporation may well be so satisfied as it was only seeking the retention of $3.5 million in assets in the Trust. Therefore, the Court will grant liberty to the Owners Corporation to contact the chambers of Slattery J to indicate whether it wishes to have the motion dismissed, or adjourned to be heard in the defect proceedings. The Court will act upon that option. These orders will not commence for approximately one month to allow the Owners Corporation to make that election, and apply for a freezing order if so advised.
4. Whichever way the Owners Corporation elects to have the motion dealt with, it seems to the Court that the costs of the Owners Corporation motion are essentially the parties' costs in the defect proceedings. Unless any party wishes to submit otherwise, the Court will order that the parties' costs of the Owners Corporation motion will be each party's costs in the defect proceedings. They will be treated as the costs of the Owners Corporation and 1A Eden in those proceedings.
5. That only leaves the remaining question of costs in these proceedings. Neither side has achieved success over the other since 25 March 2022. So each party will bear its own costs of these proceedings incurred since that date.

Conclusions and Orders

1. For these reasons the Court makes the following orders: 1. For the purposes of these orders the following expressions shall have the following meanings 1. "Garawin" means the plaintiff; 2. "1A Eden" means the first defendant; 3. "Zaarour Investments" and "Mr Zaarour" mean the second and fourth defendants respectively; 4. "Joesandra" means the third defendant; 5. "the defect Proceedings" means proceedings 2017/362562 in the Technology and Construction List of this Court; 6. "the Owners Corporation" means the plaintiff in the defect proceedings; 7. "Lot" followed by a number is a reference to a lot in Strata Plan 92226; 8. "the accounting issues" means the accounting issues among the parties to these proceedings that are identified under the heading "the remaining issues" in the reasons published by the Court on 25 March 2022; 1. Lift the stay on Order (2) ordered by Order (8) of the Court's orders of 25 March 2022 but upon lifting of the stay said Order (2) will be varied and made in the form of Order (3) below. 2. Order that each of 1A Eden, Garawin, Zaarour Investments, Joesandra and Mr Zaarour shall from Wednesday, 5 April 2023 take all necessary steps on his or its part (including making all reasonable endeavours to obtain the consent of third parties that may be necessary to the taking of such steps) to, 1. remove all encumbrances from the certificates of title for Lots 3, 5 and 6 registered in the name of 1A Eden imposed thereon at the request of Garawin or any related party of Garawin since 30 November 2017; and 2. transfer Lots 3 and 5 to Garawin, but 3. must retain Lots 6 and 27 in the name of 1A Eden until the resolution of the defect proceedings or until further order. 1. Note the Court will make no order as to costs in these proceedings in respect of the parties' costs after 25 March 2022 to the intent that each party will bear his and its own costs for that period. 2. The Owners Corporation is directed to inform the Court and the parties by Friday, 17 March 2023 whether it elects to have its motion of 3 February 2023 dismissed or transferred to the Technology and Construction List. 3. Grant liberty to apply. 4. Orders (4) and (5) of the Court's orders made on 25 May 2022 are dissolved from Wednesday, 5 April 2023.

Amendments 02 March 2023 - Order (7) added 03 March 2023 - Order (5), amend "id" to "is" DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 March 2023