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[2018] WASC 66
General information, not legal advice.
Supreme Court of WA
2018-03-06
Archer J
Original judgment source is linked above.
1 The defendants seek a stay of a judgment delivered by BanksSmith J on 17 November 2017 (Judgment)[1] and the orders made as a consequence of the Judgment. The defendants seek the stay on the ground that they have an unresolved counterclaim against the plaintiffs.
2 The following background is taken primarily from the Judgment.
3 The first plaintiff (Habitat) specialises in the design and construction of commercial and office fit outs.
4 The first defendant, Christian Formby, was a founding director of Habitat. He was also, at all material times, the sole company secretary. His family trust held 50% of the issued shares in Habitat. The second defendants are Mr Formby and Ms Chantelle Formby as trustees of the Formby Family Trust.
5 In February 2013, Geoffrey Pritchard, through the second plaintiff (Maliza), acquired the other 50% of Habitat from a third party. Mr Pritchard also became a director of Habitat. Mr Pritchard is the defendant by counterclaim. A Shareholders Deed was executed by Habitat, Maliza and the second defendants.
6 Mr Formby was employed as the managing director of Habitat under the terms of an Executive Services Agreement made between him and Habitat on 22 February 2013 (ESA). The ESA included a restraint of trade clause.
7 In February 2016, Mr Formby left Habitat. The parties disputed the circumstances of Mr Formby's departure. BanksSmith J found that he had resigned.
8 Habitat commenced an action alleging that Mr Formby breached the restraint of trade clause after he left (restraint claim). Habitat also alleged that the second defendants were obliged to repay certain loans made to them by Habitat (loan claim).
9 Mr Formby counterclaimed that Habitat underpaid his employment entitlements.
10 The defendants also brought a counterclaim, alleging that the plaintiffs and Mr Pritchard had wrongly converted the second defendants' shares in Habitat after Mr Formby resigned (wrongful conversion counterclaim).
11 BanksSmith J considered it was appropriate to accommodate an urgent hearing of the restraint claim. It was not possible to deal with all of the claims made by the parties in that urgent hearing. In particular, expert evidence was required before the wrongful conversion counterclaim would be ready for hearing. Accordingly, an urgent hearing was arranged to resolve Habitat's claims and Mr Formby's counterclaim. The wrongful conversion counterclaim was deferred, to be dealt with in the usual way.[2]
12 On 17 November 2017, BanksSmith J gave judgment on Habitat's claims and on Mr Formby's counterclaim.[3]
13 In relation to Habitat's claims, her Honour found that:
14 In relation to Mr Formby's counterclaim, her Honour found that Habitat had underpaid his employment entitlements.
15 On 30 November 2017, BanksSmith J made orders reflecting the Judgment (30 November orders). The monetary orders were:
16 The matter was otherwise adjourned to 12 December 2017 for directions. At this point, the matters yet to be resolved were the assessment of damages for the breach of the restraint clause and the defendants' wrongful conversion counterclaim.
17 On 11 December 2017, the defendants filed an application for a stay of the Judgment and the 30 November orders. The defendants sought the stay on the ground that the wrongful conversion counterclaim was unresolved.
18 On 12 December 2017, the defendants appeared in person. BanksSmith J advised them that the wrongful conversion counterclaim was unlikely to succeed, both at law and in view of the evidence Mr Formby had given during the trial.[4] Her Honour granted an interim stay of orders 1 and 2 of the 30 November orders for the purpose of allowing the defendants to obtain advice and replead their counterclaim.[5] BanksSmith J ordered that any minute of proposed amended counterclaim be filed and served by 22 December 2017. Her Honour made programming orders in relation to the stay application and listed it for hearing on 22 January 2018.
19 On 16 January 2018, the first and second defendants filed a substituted counterclaim.[6] In common with the wrongful conversion counterclaim, the substituted counterclaim concerned the transfer of the second defendants' shareholding in Habitat to Maliza. However, the basis for complaint was fundamentally altered. The substituted counterclaim alleged that the share transfers, and the issue of certain shares to Maliza, contravened s 232 of the Corporations Act 2001 (Cth). It also alleged that Mr Pritchard breached statutory and fiduciary duties in relation to the transfer and issue of those shares.
20 Given the late filing of the substituted counterclaim, the hearing on 22 January 2018 was vacated. The matter was relisted for hearing before me on 7 February 2018.
21 On 6 February 2018, the day before the relisted hearing date, a minute of a proposed amended counterclaim was sent to the court. It added a new allegation that the plaintiffs had breached cl 11.1 of the Shareholders Deed. However, during the hearing of the stay application, counsel for the defendants appeared to accept that this allegation may not be sustainable on the proper construction of cl 11.1.[7]
22 Section 15 of the Civil Judgments Enforcement Act 2004 (WA) permits a person against whom a judgment is given to apply for an order suspending the enforcement of all or part of the judgment.
23 Where a party seeks such an order, the starting point is that the successful litigant should be entitled to enforce the judgment without delay.[8] A court may only order a stay if there are special circumstances that justify doing so.[9] It is for the party seeking the stay to persuade the court to exercise its discretion.[10]
24 Special circumstances justifying a stay may exist where the defendant has an unresolved counterclaim against the plaintiff.
25 There is no closed list of factors that the court may consider in deciding whether to order a stay in such a case. Many factors have been identified in the authorities.[11] However, generally, where the counterclaim is in effect an unconnected crossaction, the court should not order a stay.
26 Despite its age, the leading authority in this area is State Bank of Victoria v Parry.[12] In that case, Malcolm CJ was considering the defendants' application for a stay of execution on a summary judgment, pending the determination of other proceedings. In dealing with that issue, Malcolm CJ set out the principles that apply where a defendant seeks a stay pending the determination of a counterclaim.
27 Malcolm CJ said that some of the factors that the court may consider are the degree of connection between the claim and the counterclaim, the strength of the counterclaim, and the ability of the plaintiff to satisfy any judgment on the counterclaim. He said:[13]
Where the counterclaim arises out of quite a separate and distinct transaction, or there is no connection between the claim and the counterclaim, the proper order is for judgment for the plaintiff with costs without a stay pending the trial of the counterclaim. ...
In general ... a counterclaim which is in effect an unconnected crossaction will not provide a basis for a stay.
28 In considering the degree of connection between the claim and the substituted counterclaim, Habitat's restraint claim can be put aside. The damages for the breach of the restraint clause have not yet been assessed, so there is not yet an order requiring the defendants to pay money in relation to that claim.
29 The critical claim against which the substituted counterclaim falls to be compared is Habitat's loan claim.
30 In the Judgment, BanksSmith J found that various distributions made to shareholders were loans, as were insurance payments and some personal expenses. Her Honour found that the terms of the loans were set out in a schedule to Habitat's Constitution, the 'Company Loans Schedule' (loan agreement).[14]
31 The second defendants failed to pay interest when required by the loan agreement. Consistently with the provisions of the loan agreement, Habitat gave the second defendants an opportunity to rectify their default. The second defendants did not rectify their default.[15]
32 Her Honour found that the second defendants' nonpayment of interest on the loan comprised a default, and Habitat was entitled to call up the loan.[16] Accordingly, her Honour ordered the second defendants to pay Habitat an amount equivalent to the total debt (as found by her Honour), plus interest.
33 In addition to Habitat's right to call up the loan, the second defendants' failure to remedy their default gave nondefaulting shareholders a call option to acquire all of their shares under cl 19.2(d)(ii) of the Shareholders Deed. Maliza, as the only nondefaulting shareholder, decided to exercise that right, sending an 'exercise notice'. This gave Maliza the contractual right to acquire the second defendants' shares for a sale price determined by a 'Valuer' in accordance with cl 12.6(b) but discounted by 20%.[17]
34 A valuer assessed the shares to be virtually worthless (Valuation). In about June 2016, Maliza paid the second defendants $0.64 in accordance with the formula under the Shareholders Deed and acquired their shares.
35 The defendants do not challenge Maliza's entitlement to acquire the shares. What is challenged is the manner in which the shares were acquired.[18] The defendants challenge whether the valuer was a 'Valuer' for the purposes of the Shareholders Deed.[19] They further point out that his report did not meet the requirements for admissibility of an expert report. In addition, the defendants challenge the accuracy of the Valuation by referring to the treatment of the defendants' loan as a bad debt.[20] The defendants' overriding submission is that Habitat was undervalued and, as a result, the second defendants were paid too little when the shares were acquired.
36 The second defendants submit that the loan claim and the substituted counterclaim 'couldn't be more connected'. They submit that, if they had not breached the loan agreement, Maliza would not have been entitled to acquire their shares. The defendants also submit that 'the entitlement of the second defendant to obtain the loans in the first place arose from their shareholding in the first plaintiff, and it's precisely that shareholding which is the substance of the counterclaim'.[21]
37 I accept there is a connection in the sense identified by the defendants. In other words, 'butfor' the second defendants' breach, Maliza could not have acquired the shares. However, in my view, that is not a meaningful connection in the context of a stay application.
38 The loan claim sought to establish that the money was owed. BanksSmith J found that the money was owed and that Habitat was entitled to call in the loan. The substituted counterclaim does not, and could not, challenge these findings.[22]
39 The share transfers complained of in the substituted counterclaim occurred after Mr Formby's employment was terminated and after the loan was called in. The alleged wrongdoing in relation to the share transfers is entirely unrelated to whether the money was owed and whether Habitat was entitled to be repaid. Indeed, the alleged wrongdoing is not that Maliza was not entitled to purchase the shares as a result of the default. The alleged wrongdoing is merely the manner in which this occurred.
40 The counterclaim arises out of 'quite a separate and distinct transaction'. There is nothing unjust about allowing the plaintiffs to have the fruits of their judgment without regard to the substituted counterclaim.
41 In my view, this is sufficient to dispose of the defendants' application. In any event, as will be seen, a consideration of other factors does not lead to a different conclusion.
42 Counsel for the defendants did not assert that the counterclaim had strong prospects of success. Rather, he submitted it was 'at least arguable'.[23] For the purposes of this application, I will assume it is arguable.
43 While I accept this is a factor in favour of granting the application, it cannot be sufficient of itself. Further, the weight to be given to this factor will be affected by the strength of the case. That a case is merely 'at least arguable' is not a powerful factor.
The ability of the plaintiffs to satisfy any judgment
44 In considering the ability of the plaintiffs to satisfy any judgment, it is necessary to identify who would be liable to pay damages if the defendants succeeded on their counterclaim.
45 The defendants adduced evidence which suggests Habitat would be unable to pay damages if the counterclaim was successful.[24] If Habitat might be liable to pay damages if the counterclaim was successful, this would favour granting a stay.
46 As noted earlier, the defendants' complaint relates to the alleged undervaluation of the shares and resulting underpayment. The shares were acquired under the Shareholders Deed by Maliza, acting through Mr Pritchard. The defendants submit that Habitat could be held liable because the Valuation was issued to Habitat and it therefore had a role in the Valuation. The defendants also submit that Habitat is responsible for maintaining its own members' register, and Maliza could not have transferred the shares without Habitat's consent.[25]
47 It is not obvious that Habitat would be held liable. It was Maliza who acquired the defendants' shares, and it was Maliza who, on the defendants' case, paid too little for them. Mr Pritchard acted on behalf of Maliza. However, for the purposes of considering this factor, I will assume that Habitat could be liable.
48 In my view, the weight to be given to this factor will be affected by the likelihood of success and the damages likely to be awarded.
49 As noted earlier, I have accepted, for the purposes of this application, that the counterclaim is arguable. The question of damages, however, raises a number of considerations.
50 Counsel for the plaintiffs submitted that, even if the defendants were to succeed on their counterclaim, the defendants could not have suffered any loss unless the Valuation was actually wrong.
51 As noted earlier, the Valuation assessed the shares to be virtually worthless. The defendants submit the Valuation was wrong. Accordingly, the defendants submit they were underpaid for their shares. The defendants submit that, if they are able to establish the allegations in their counterclaim, they would be entitled to damages in the amount of what they should have been paid if a proper valuation had been obtained (which would be the value of the shares less a 20% discount).
52 The primary difficulty with this submission is that the defendants have had over a year to obtain expert evidence to challenge the Valuation but have not done so. Under the wrongful conversion counterclaim, the defendants needed expert evidence of the proper valuation of their shares to prove their alleged loss. Under the substituted counterclaim, they need the same expert evidence to prove their alleged loss. In the 14 months since they filed the wrongful conversion counterclaim, it seems that the defendants have done nothing to obtain this evidence.[26]
53 Counsel for the defendants submitted that the Valuation was wrong on its face because the valuer wrote off the loan to the second defendants as a bad debt. Counsel said that, as a result of the Judgment, that was no longer true. He said that, if the loan had not been treated as a bad debt, the business would have been valued at $463,000. The second defendants' shares, being 40% of the issued capital, would then be worth $185,200.[27] Accordingly, while not accepting the other components of the Valuation, counsel for the defendants submitted that the value of the shares was more than nominal.
54 I do not accept this submission. As was pointed out by counsel for the plaintiffs, the shares are to be valued as at the date of transfer. As at that date, the defendants' loan was rightly treated as a bad debt. Indeed, while judgment has now been given, the defendants have still not paid their debt.
55 The defendants also sought to rely on two other purported valuations to dispute the Valuation.
56 The first 'valuation' was prepared by Mr Pritchard in January 2016, which was before Mr Formby resigned. Mr Pritchard swore an affidavit explaining that he prepared that valuation for the purposes of discussing with Mr Formby what the business could be worth if Mr Formby applied himself and worked productively for the business.[28] This evidence was not challenged. Accordingly, the first 'valuation' cannot be used to assess the proper value of the shares.
58 This amount is considerably less than the fixed amounts owing under the 30 November orders. The defendants must also pay 85% of the plaintiffs' costs and the damages to be assessed for the breach of the restraint clause.
59 More importantly, after this valuation was obtained, Mr Formby resigned. Mr Pritchard's evidence was that Mr Formby's role had been to obtain work for Habitat. He said that Habitat's 'pipeline' of work decreased significantly after Mr Formby's resignation.[31] Counsel for the defendants accepted that Mr Formby's departure would have caused the value of the shares to decrease to an extent.[32]
61 The defendants also relied upon an email sent by Mr Pritchard in January 2016. In the email, Mr Pritchard said the business was worth $6.5 million.[35] Mr Pritchard's affidavit explained that this was simply a number he calculated based on the previous period's earnings.[36] This evidence was unchallenged. Therefore, the email provides little reliable evidence of what the shares were worth in January 2016. The email is of no relevance to what the shares were worth after Mr Formby resigned.
62 Counsel for the defendants properly acknowledged that the defendants could have obtained expert evidence of the value of the shares. He ultimately submitted 'I can only put the evidence as high as there's an inference here that the shares are worth something much more'.[37]
63 As noted earlier, the defendants have had over a year to obtain expert evidence of the value of the shares to contradict the Valuation. It appears that the defendants have taken no steps to do so.
64 In the circumstances, Habitat's likely inability to satisfy any judgment if the counterclaim is successful is not a sufficiently powerful factor of itself, or in combination with the other circumstances, to justify denying Habitat the fruits of its judgment.
65 Counsel for the defendants further submitted that a stay should be granted because, in the ordinary course of events, the counterclaim would have been dealt with at the same time as the other parts of the proceedings. Counsel submitted it was unfair that the defendants will have to pay the judgment sum before their counterclaim is determined simply because the proceedings were split.
66 In some cases, this would be a significant factor in favour of a stay. This is not such a case.
67 The other parts of the proceedings were dealt with on an urgent basis due to the restraint claim. It was not possible to include the counterclaim in that urgent hearing as it required expert evidence which had not yet been obtained.
68 The original counterclaim as pleaded was deficient. This was properly conceded by counsel for the defendants (who was not counsel at the time the original counterclaim was filed, and who was only recently instructed).[38] If the expert evidence had been available, and if the original counterclaim had been included in the hearing of the other matters, it is highly likely the original counterclaim would have been dismissed.
69 The deficiencies in the original counterclaim were made obvious by the plaintiffs' reply,[39] which was filed on 23 December 2016.[40] The defendants took no action to remedy the deficiencies throughout 2017. On 12 December 2017, BanksSmith J ordered the defendants to file any amended counterclaim by 22 December 2017. The defendants did not meet this deadline.
70 In addition, the defendants have still not obtained any expert evidence. Expert evidence would have enabled an assessment of the likely damages that would be awarded if they were successful on their counterclaim.
71 In the circumstances, while the separation of parts of the proceedings is a factor in favour of a stay, I do not consider it to be a powerful factor.
72 There will be some delay before the counterclaim can be determined. The substituted counterclaim was only filed on 16 January 2018, and the proposed amended counterclaim was only sent on 6 February 2018. The hearing of the substituted counterclaim or the amended counterclaim will require expert evidence. This delay is entirely the fault of the defendants. If the defendants had not filed a deficient counterclaim, or had rectified the deficiency promptly upon receiving the plaintiffs' reply, and had progressed their counterclaim with even moderate attention, it is likely that the matter could have been heard in 2017. Instead, they waited over a year to remedy the deficiency and have apparently taken no steps to obtain the necessary expert evidence.
73 On the face of the pleadings, there is a complete identity of the parties. Habitat is the party entitled under the Judgment to be repaid the loan amount and is also one of the parties against whom the substituted counterclaim is brought.
74 However, as noted earlier, it has emerged that the defendants' actual complaint is the alleged undervaluation of the shares and resulting underpayment. The shares were acquired under the Shareholders Deed by Maliza, acting through Mr Pritchard. It is not obvious that there is a clear identity of parties in relation to the actual issue in dispute. However, I am willing to assume that there is, for the purposes of this application.
75 There is no evidence of any specific prejudice to the plaintiffs if a stay were to be granted, other than the consequences that always follow a stay, being the denial of the fruits of the Judgment. Accordingly, prejudice to the plaintiffs is not a factor weighing against a stay. However, the failure of the defendants to properly progress their counterclaim does mean that the plaintiffs would be denied the fruits of the Judgment for longer than should have been the case.
76 During the hearing of the stay application, counsel for the defendants said that, if the defendants' failure to obtain expert valuation evidence was going to be determinative, he would seek instructions to have the matter adjourned partheard to enable the defendants to obtain that evidence.[41]
77 Their failure, while significant, is not determinative. However, even if it had been, I would not have allowed the application to be adjourned. To do so would have given the defendants a defacto stay during the period of time required to obtain evidence that they should have obtained a year ago.
78 The starting point is that the successful litigant should be entitled to enforce the judgment. The defendants do not contest that they owe the judgment sums. They have not progressed their counterclaim with appropriate attention. Had they done so, it is likely that the counterclaim would have been heard last year. They have taken no steps to allow the court to evaluate the potential quantum of damages if they were to succeed on their counterclaim.
79 The factors in favour of granting a stay are insufficient to establish special circumstances. I decline to order a stay.
80 The defendants' application for a stay of the judgment of BanksSmith J delivered on 17 November 2017 and of the orders made by her Honour on 30 November 2017 is dismissed.
[1] Habitat 1 Pty Ltd v Formby [No 2] [2017] WASC 331 (Habitat [No 2]).
[6] First and Second Defendants' Substituted Counterclaim dated 16 January 2018.
[8] State Bank of Victoria v Parry [1989] WAR 240, 244; Eastland Technology Australia Pty Ltd v Whisson [2003] WASCA 307; (2003) 28 WAR 308 [9]. These cases dealt with stay applications brought under the Rules of the Supreme Court 1971 (WA), but the same principles apply to applications under the Civil Judgments Enforcement Act - Boase v Asica Developments Pty Ltd [2009] WASC 183 [9].
[9] Section 15 of the Civil Judgments Enforcement Act 2004 (WA).
[10] Eastland Technology Australia Pty Ltd v Whisson [9].
[11] New Resource Holdings Pty Ltd v Lunt [No 3] [2008] WASC 221 [40].
[12] In Eastland Technology Australia Pty Ltd v Whisson [8], the Full Court described it as '[p]erhaps the leading authority in this jurisdiction'. It has been repeatedly cited in this jurisdiction and in others, including as recently as 2017 (Citigroup Pty Ltd v Remta [2017] WASC 181 [16]; Cummeragunja Local Aboriginal Land Council v Nicholson [2017] NSWSC 394 [19]).
[13] State Bank of Victoria v Parry (246).
[14] Habitat [No 2] [310] [318], [456].
[17] See cl 19.2(d)(ii), (iii) and (iv) of the Shareholders Deed.
[19] The valuer was not a 'Valuer' as defined in cl 1.1 of the Shareholders Deed.
[21] ts 478 - 479, 7 February 2018 (noting that there is a typographical error in the transcript).
[22] The defendants have not appealed against the judgment - ts 492, 7 February 2018.
[23] First and Second Defendants' Submissions in support of an Order for Suspension or Stay of Judgment dated 5 February 2018.
[24] Affidavit of Christian Matthew Formby sworn 2 February 2018.
[27] The second plaintiff had the right to acquire the shares for their value, less 20%. If the proper value was $185,200, the defendants' loss was approximately $150,000.
[28] Affidavit of Geoffrey Thomas Pritchard sworn 6 February 2018 (Pritchard affidavit) [13].
[30] Being 40% of the total value, less 20%, in accordance with the Shareholders Deed.
[39] This was conceded by counsel for the defendants - ts 492, 7 February 2018.
(2003) 28 WAR 308