BETWEEN : GFS MANAGEMENT SERVICES PTY LTD (ACN 051 681 077)

GROUND AND FOUNDATION SUPPORTS PTY LTD (ACN 009 432 964)

Practice and procedure - Judgments and orders - Application for stay of orders pending appeal - Whether order is a consent order embodying a contract between parties - Whether consent order unappealable except with the leave of the trial judge - Whether there is an arguable case for appeal rather than a tactic for delaying execution - Whether there is sufficient risk that appeal may be nugatory if stay of execution is not granted

Supreme Court Act 1935 (WA), s 142, s 60(1)(e)

(Respondent to the appeal) : Mr P I Jooste QC & Ms I C K Burford

Benfield v Australian National Railways Commission (1992) 8 WAR 285

Cliffs Robe River Iron Associates v Dravo P/L (1988) WAR 322

Federal Commissioner of Taxation v Myer Emporium Ltd (No 1) [1986] HCA 13; (1986) 160 CLR 220

Hamersley Iron P/L v Lovell (No 2) (1998) 20 WAR 79

R D Werner & Co Inc v Bailey Aluminium Products P/L (1988) 80 ALR 134

1 TEMPLEMAN J: This is an application for a stay of orders made by Scott J on 25 June of this year following the trial of an oppression action.

2 The applicant, in the action, GFS Management Services Pty Ltd, is the alter ego of Mr Graham Menz who established some expertise in a particular engineering process. The second respondent was Mr Kerin Francis Smart who is the trustee of a trust of which Mr Philip Patterson is a beneficiary. The third respondent, Brencolda Nominees Pty Ltd, is a trustee company representing the interests of a Mr Brent Black. The company which was the subject of the application, Ground and Foundation Supports Pty Ltd, was the vehicle by which Mr Menz's expertise was exploited.

3 The agreement between Mr Menz, Mr Black and Mr Patterson, was that Mr Menz would hold 30 per cent of the issued shares in Ground and Foundation Supports Pty Ltd, to which I will refer as "the company", and Mr Patterson and Mr Black would each hold 35 per cent of the issued shares.

4 The application was based on allegations that Mr Menz had been oppressed in a number of respects. Three matters were relied on. However, the learned trial Judge found that only one ground had been made out. In substance it was that Mr Menz had been wrongfully excluded from the company, having been dismissed as managing director without notice and without any opportunity to state his case.

5 The order proposed by the learned trial Judge was that Mr Menz's shares, which his Honour found to be worth $180,000, be purchased at that price. On 11 June 2001 when the trial Judge delivered his reasons, he took the matter no further than that. He left it to the parties to make submissions as to the appropriate order which would give effect to those reasons. There then followed considerable debate between the trial Judge and counsel which resulted in an order being made for the purchase of Mr Menz's shares in the company, by the company itself, with liberty to apply in the event of non-compliance with that order. It was envisaged that if the company did not comply with the order, the second and third respondents would be ordered to purchase the shares in its place. His Honour also made an order that the $180,000 price carry interest at the rate prescribed from time to time under s 142 of the Supreme Court Act.

6 The respondents have instituted an appeal from that decision. They now seek a stay of the proceedings on the grounds that there is a substantial risk, that if the appeal is successful, but the shares have been purchased for $180,000 in the meantime, it may not be possible to recover that money, thereby rendering the appeal effectively nugatory.

7 There is a threshold question which has been raised by the respondent to the appeal, that is, by the successful applicant in the matter before the trial Judge. The threshold question is whether the order made after trial was in the nature of a consent order which would make it unappealable except with the leave of the trial Judge himself; and then only on the basis that the order embodied a contract between the parties.

8 The question arises from s 60(1)(e) of the Supreme Court Act which provides:

"No appeal shall lie to the Full Court without the leave of the Judge or Master making the order and the order of a Judge or Master made with the consent of the parties or as to costs only which by law are left in the discretion of the Judge or the Master."

9 The threshold question therefore is whether the order under appeal was made with the consent of the parties. Mr Jooste QC who appears for the respondent to the appeal has taken me in considerable detail through the argument which followed from the delivery of the learned trial Judge's reasons. Without reciting the exchanges in any detail, and I hope doing justice to Mr Jooste's submissions, I think the position can be summarised in this way.

10 At the commencement of the trial, the company appeared by counsel and agreed to abide by the decision of the Court subject to conditions which are not presently relevant. Indeed, the company had filed a notice to that effect.

11 Counsel for the company was, however, involved in the argument about the means by which the trial Judge's order should be carried into effect. In the end, it was common ground that in some way or another the company and the second and third respondents should bear some liability for payment of the $180,000.

12 The rival contentions were these: it was submitted for the company that as a matter of law, an order could not be made which required the company and the second and third respondents to be jointly liable for purchase of the company shares. The basis for that submission was that if the company purchased its own shares, then those shares would disappear in the sense that the chose in action would be extinguished. In that event, there would be nothing for the second and third respondents to buy.

13 Against that, the applicant's position was that if an order was made against the company for the purchase of its shares and the company did not comply with that order, the second and third respondents should then be held liable to make the payment which the company had failed to make.

14 Those were the rival contentions. In the end, his Honour cut the Gordian knot by making an order that the company pay the $180,000 for the purchase of its shares with liberty to apply; it being envisaged, as I have said, that if the company did not comply with the order, an order would be made imposing liability for the purchase on the second and third respondents.

15 It is submitted by Mr Jooste that in those circumstances the order must be regarded as a contract between the parties because they were ad idem that in some way or other, all three respondents should or could be made liable for the payment of $180,000.

17 It is true that the parties consented, in the sense that they were in agreement that one or other of the proposals would be effective. But that was not, in my view, a consent in the contractual sense. It was, rather, a working out of an order which was imposed upon the parties by the judgment of the trial Judge.

18 Mr Jooste submits, and I accept, that the law in relation to this aspect of the matter is summarised conveniently in paragraph 63.0.19 of Seaman under the heading Leave to appeal against consent orders. The author observes:

"However, it will frequently be the case that upon a true analysis there is no intention on the part of solicitors to create legal relationships when they consent to orders and that there is no underlying contract: Cliffs Robe River Iron Associates v Dravo Pty Ltd (1988) WAR 322 at 330. The court will encourage the ready consent of practitioners to sensible arrangements which will normally be understood by them to be subject to their entitlements to apply to the Court for variation of the orders to which they have consented: Werner v Bailey Aluminium (1988) 80 ALR 134 at 136."

19 That, I think, is the position here: the parties consented only in the sense that they worked out the way in which his Honour's order should be carried into effect. That is a course which is followed very often in these days. The Court frequently sends people away to confer with a view to resolving differences and producing orders which, although they are consent orders in one sense, are nevertheless made under pressure of the Court's requirement that they resolve the matter between themselves. They do not do so as a matter of contractual intention but as a matter of professional obligation. In such circumstances, the Court must be careful not to identify a contractual relationship between the parties.

20 If a contract had arisen between the parties in the making of this order, then it would have been necessary for the application to be heard by the trial Judge, who is not presently available to deal with it. But as there is no such contract, it is open to me to deal with the application on the merits.

21 I therefore turn to the criteria which must be applied when considering an application of this kind. Again I turn to Seaman, par 63.15.1 under the heading The grounds for a stay. The principles are set out in the following terms:

"The discretion to stay execution pending an appeal is unfettered and the applicant for a stay carries the onus of showing that the circumstances are appropriate for a stay to be granted. Before weighing other factors the court needs to be satisfied that there is an arguable case for an appeal to ensure that the appeal has not been lodged simply to delay execution: see Croney v Nand [1998] QCA 367; [1999] 2 Qd R 342 at 348, 349 CA. The onus is upon the applicant to demonstrate a proper basis for a stay which will be fair to all parties and the court will weigh the balance of convenience and the rights of the parties: Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685, 69." Appropriate circumstances may exist if it is shown that if a stay of execution is not granted, the appeal may be nugatory: Wilson v Church (No 2) (1879) 12 ChD 454 at 458, or that serious injury will result to the applicant unless a stay is granted: McBride v Sandland (No 2) [1918] HCA 59; (1918) 25 CLR 369 at 375. An appeal will be nugatory when, because of the respondent's financial state, there is no reasonable prospect of recovering moneys paid to him or her pursuant to the judgment, but appropriate circumstances are not limited to that situation and will exist whenever there is a real risk that it will not be possible for a successful appellant to be restored substantially to his or her former position: Federal Commissioner of Taxation v Myer Emporium Ltd (No 1) [1986] HCA 13; (1986) 160 CLR 220 at 223 ...".

"Inconvenience and the possibility of some risk to the appellant's property do not constitute special circumstances (Cox v Simeon FCt SCt of WA, Library 5063, 7 September 1983, unreported). Neither does the mere preservation of the status quo, nor by themselves do the merits of the appeal. Furthermore, it is not sufficient to constitute special circumstances that the appeal is arguable, is being pursued in good faith and with expedition and that the stay will not prejudice anybody: Hamersley Iron Pty Ltd v Lovell (No 2) (1998) 20 WAR 79 at 80, 88 (FC)."

22 Applying those principles, it is necessary first to consider whether there is an arguable case for appeal so as to ensure that the appeal has not been lodged simply to delay execution. If I am satisfied as to that, I must then go on to consider whether there is a real risk that if the appeal were to be successful, the successful appellants would not be restored substantially to their former position.

23 As to the merits of the appeal, it is submitted that the learned trial Judge made a clear error in his findings of fact.

24 I referred earlier to the ground of oppression which his Honour found had been made out; namely, the summary dismissal of Mr Menz as managing director of the company. The dismissal was effected at a meeting of the directors on 11 February 1999, being the second of two meetings held on that day.

25 The trial Judge referred to the dismissal meeting as having been attended only by Mr Black and Mr Patterson, a meeting of which no notice was given to Mr Menz.

26 The appellants contend that the trial Judge erred in finding that only Mr Black and Mr Patterson attended the meeting, there being evidence in the form of a minute of the meeting, tendered by Mr Menz himself, which showed that he had been present.

27 The appellants contend further that during the course of the hearing nobody suggested that Mr Menz had not been present at the meeting - nor did Mr Menz suggest it - and the trial proceeded on that basis.

28 Without in any way purporting to prejudge the appeal, it seems to me, on the basis of the evidence as it has been summarised to me by the appellants, in a way which has not been contested by Mr Jooste for the respondent, that a prima facie error is disclosed in the trial Judge's reasons.

29 Mr Jooste says that even if there is an error, it is of no consequence because the trial Judge was quite right to say that no notice was given to Mr Menz of the resolution, there being clear evidence to that effect in the cross-examination of Mr Patterson and of Mr Black.

30 The difference, then, is between a meeting of which no notice was given to Mr Menz at which he was present, and a meeting of which no notice was given, at which he was not present.

31 I accept Mr Jooste's submission that a letter written on 11 February 1999, which the trial Judge set out in full, which was written on behalf of Mr Menz by his solicitor and which was considered by all concerned before the meetings, made Mr Menz's position as managing director of the company untenable.

32 But even though Mr Menz's position was untenable, it was nevertheless necessary for him to be given an opportunity to consider his position and to speak against the motion: and that was an opportunity which was denied him, whether he was present at the meeting or not. In my view, it cannot be said with certainty that the outcome of the action would have been the same if there had been no error on the part of the trial Judge . In oppression actions there is often considerable room for argument as to whether or not conduct complained of is oppressive and it seems to me that the appellant has raised a sufficiently arguable case in the present circumstances.

33 I emphasise that I should not be taken as deciding that the trial Judge did fall into error, or as indicating the likely outcome of the appeal. My decision is simply that there is an arguable case on appeal; and I am satisfied that the appeal has not been lodged simply to delay execution. I must then consider the further question: whether there is a sufficient risk that the appeal would be rendered nugatory unless the stay of execution was granted.

34 There are two limbs to the appellant's argument. The first is that if the order made by the trial Judge was carried into effect, that is to say, if the company purchased its own shares, then those shares would disappear, in the sense that the chose in action would be extinguished. That being so, it is submitted, if the appeal was successful, those shares could not be restored to Mr Menz's company because they would no longer exist.

35 Even if new shares were issued, it is submitted, they could not be issued retrospectively so that there would be inevitably some interval between the extinguishment of the first shares and the issue of the second, which may or may not be significant.

36 Against that, it is submitted by Mr Jooste that the Corporations Law envisages that a corporation may hold its own shares if it does so pursuant to s 259A and a court order. Furthermore, Mr Jooste says, if appropriate orders were made, the shares could be transferred not to the company but to a nominee which could then restore the shares to the original applicant, if the appeal were to be successful. In that way, also, the shares could be preserved.

37 I accept those submissions. It seems to me that in those circumstances there is no risk of the shares being extinguished: and, that risk could be eliminated by an appropriate order. The more substantial question, I think, is whether there is a sufficient risk that if the money is paid over, it will not be recoverable should the appeal be successful.

38 In order to answer that question it is necessary to refer to the fact that when Mr Menz was dismissed from the company he established another company called Compile with which to carry on his business activities. When submissions were made to the trial Judge, either during the trial or in the course of later argument, reliance was placed on an affidavit filed by Mr Menz or on his behalf in which it was said that Compile had substantial borrowings, which were being serviced by Mr Menz or one of his companies. This evidence was adduced in support of a claim for equitable compensation of some kind.

39 The risk that the appellants foresee in these circumstances is that if $180,000 is paid over to the applicant, it will be used by Mr Menz to discharge Compile's indebtedness to the bank. If that is the case, the appellants say, they may be successful on appeal but be left with a claim against an empty company. The applicant, they say, is inactive: it is Compile which is now carrying on Mr Menz's business. Compile is not, of course, a party to the proceedings and no order could be made against it requiring it to disgorge $180,000, if the appeal were to be successful.

40 Against that, Mr Jooste says there is no demonstrated risk: there is simply speculation that that may be the result. In those circumstances, Mr Jooste submits, no stay should be granted.

41 In my view, the issue is finely balanced. However, it does seem to me that there is a real commercial risk that if the money was paid to the respondent, that money would be used by Mr Menz to discharge Compile's indebtedness in the way which the appellants fear. I am reinforced in that view by the fact that there has been no evidence from Mr Menz to suggest that the money would not be used in that way.

42 I appreciate that there is no obligation on a respondent in these circumstances to file evidence. However, it does seem to me that when the risk has been clearly spelt out in the application, a respondent is at risk of an unfavourable conclusion if he chooses not to deal with that point.

43 That being so I turn to consider the balance of convenience and possible prejudice to the respondent. It seems to me that the balance of convenience favours the grant of a stay in these circumstances because of the risk to which I have referred. The risk could be avoided by a stay by an order which would apparently cause no prejudice to the respondent. In fact, neither the respondent nor Mr Menz has asserted any prejudice; but in any event, it seems to me that if a stay was granted on terms that the $180,000 be paid into court or into a solicitor's trust account (or possibly a joint solicitors' trust account) pending the outcome of the appeal, then the respondent's position would be preserved, bearing in mind that the order made by the trial Judge requires that the sum of $180,000 carry interest at the prescribed rate in any event.

44 For all those reasons, I am persuaded that I should grant a stay on appropriate terms, which I shall discuss with counsel.