Interactive Network Services Pty Ltd & Anor v NPV WA Securities Pty Ltd [2006] VSCA 225

The background

2 NPV WA Securities Pty Ltd ("NPV WA"), a financier, brought proceedings to recover unpaid interest and enforcement costs, arising from a loan of $2,500,000 made to Interactive Network Services Pty Ltd, ("INS"). The loan was said to have been made to INS under an agreement made in February 2001, as part of a complex film financing scheme entered into with the aim of gaining tax advantages for INS and Mr Atherton. Mr Atherton, who was a director of INS, was alleged to be liable as the guarantor of the loan. INS and Mr Atherton had entered into an earlier loan agreement with a related company of NPV WA, NPV Finance Ltd. The details of the various transactions between the parties are set out in the learned trial judge's judgment.

3 INS and Mr Atherton resisted NPV WA's claim, on the basis that the second loan agreement was not intended to have legal consequences. INS and Mr Atherton also contended that there was a total failure of consideration under the loan agreement and counterclaimed for repayment of moneys paid.

4 The learned trial judge summarised the issues raised by the defence as -

"whether [the circumstances] ... result in a conclusion that NPV Finance, NPV WA, INS, and Mr Atherton did not intend to create relationships of lender and borrower/guarantor, but instead intended that there should be no obligations between them, or different obligations of some kind, as to which the first loan agreement and the second loan agreement were no more than a disguise or a façade."[1]

His Honour rejected the proposition that the agreements were a sham and not intended to have legal consequences. He gave judgment for NPV WA against INS and Mr Atherton in the sum of $614,910.18 on 9 August 2006 and dismissed the

counterclaim made by INS and Mr Atherton.

5 INS and Mr Atherton informed NPV WA of their intention to appeal shortly after the delivery of the judgment. According to an affidavit sworn by the solicitor for INS, NPV WA was served with a copy of the notice of appeal on 24 August, one day out of time. An amended notice of appeal was delivered to the respondents' solicitors on Monday 2 October 2006.

The orders which are sought

6 INS and Mr Atherton have made three applications by summons. They have sought leave to amend the notice of appeal dated 24 August 2006 and to file and serve the notice of appeal out of time. They also seek an order staying execution of the judgment below until determination of the appeal. The respondent, NPV WA, opposes each of these applications.

Should the applicants be permitted to file and serve the notice of appeal out of time?

7 The applicants seek an extension of time in which to file a notice of appeal from the decision of Whelan, J. made on 9 August 2006. The application is made pursuant to Rule 64.20 of the Supreme Court (General Civil Procedure) Rules 2005. The grant of such an application lies within the unfettered discretion of the Court.[2]

8 The factors that are relevant to the grant of an extension of time were canvassed in Jakamarra v. Krakouer[3] as follows:

"the length of delay, the reasons for delay, whether there is an arguable case and the extent of any prejudice to the respondent, are relevant to applications for an extension of time, but not exhaustive. Other relevant matters include whether the delay was intentional or contumelious, or merely the result of a bona fide mistake or blunder, and whether the delay was that of the litigant or of its lawyers, with which the litigant should not be saddled. It may also be relevant, where the default is that of a party's legal representatives, to take into account considerations personal to the party which might have affected its ability to safeguard its own interests. The extent to which any such prejudice may be remedied by an appropriate costs order may also be relevant."

9 NPV WA submitted that the application should be dismissed, because the applicants have consistently failed to comply with the Rules by lodging a notice of appeal a day out of time, and serving an affidavit in support of the summons dated 5 September 2006, two days out of time. It was also contended that the applicants' conduct prior to trial "displayed a similar disdain for the Court's orders and the Rules ... which, among other delays, saw the trial date vacated twice"[4].

10 The nature of the discretion in Rule 64.20 leaves it open to the court to take account of an applicant's lack of diligence in conducting litigation, when deciding whether to grant an extension of time. The applicants' previous failures to meet their obligations under the Rules are regrettable. However, where the delay is short and was caused by an accidental oversight, the court should not deprive the applicant of the opportunity to have his or her appeal determined, particularly if the respondent has not suffered any prejudice as a result of the delay. For these reasons I do not accept that the applicants' failure to lodge a notice of appeal within time, standing alone, is a sufficient reason for dismissing the application.

11 The Rules that prescribe timelines are important for a number of reasons, including to ensure certainty and finality in litigation. In this case, an appeal was foreshadowed by the applicant before 24 August. While this does not cure the late filing of the notice of appeal, it contributes to the view that the respondent has suffered no real prejudice by a delay of a single day. Mr Martindale conceded that no prejudice flowed to the respondent as a result of the delay. The respondent relies instead on a perceived lack of merit in the appeal as a basis for this Court refusing the application. I now turn to that issue.

12 The respondent submits that this Court should decline to exercise its discretion to grant the extension of time because the notice of appeal, even in its amended form, is "wholly inadequate". It is alleged that the failure to articulate grounds of appeal means that the appeal is futile and that leave to extend the time to lodge a notice of appeal should be denied in consequence.

13 In Jakamarra v. Krakouer[5], Brennan, C.J. and McHugh, J. drew a distinction between an application for leave to extend the time in which an appeal could be lodged, and an application for leave to extend time for the taking of an interlocutory step after an appeal has been commenced. In the former case the grant of an application for extension of time puts "at risk the vested right of the respondent".[6] Although the court will not undertake a detailed examination of the merits of a proposed appeal, it may not extend the time if the appeal "appears to be a flimsy case and weak on the merits".[7]

14 While it is relevant to take account of the prospects of success of an appeal, the court must also keep in mind that "unless motions to extend time for appeals are to turn into full rehearsals for those appeals, appellate courts can only assess 'the merits' in a fairly rough and ready way".[8] The original notice contained three grounds of appeal, which simply asserted error in various findings of fact made by the learned judge. These grounds were very briefly stated, but the applicants have also applied for leave to amend the notice of appeal. For the reasons I give below, I would grant that application.

15 Much of the respondent's submission dealt with the merits of the original grounds of appeal and the proposed amendments. The defects in the grounds and the proposed amended notice of appeal are canvassed with considerable particularity. The respondent's outline submits that the amended notice of appeal lacks intelligibility, that it simply reiterates issues of fact determined at the trial and that some of the amended grounds are "hopeless". These matters were expanded by Mr Martindale in his submissions.

16 Most of the issues raised by the respondent against these grounds can only be resolved on a full hearing of the merits and are not appropriate for this forum. It is inconsistent with the principles of efficiency and fairness for the matters which have been raised by the respondent to be considered in any depth, in the absence of full argument. While some of the grounds may not be strong, I do not think they are as insubstantial as the respondent contends.

17 To summarise, the delay in this case was very short. The delay did not prejudice the respondent in relation to the conduct of the appeal, as was conceded by the respondent. The breach of the Rules was unintentional. The problem could have been rectified by the respondent consenting to the filing of the notice. The appeal is not one that should be dismissed because it is without merit. The interests of justice tend to the view that the applicants should not be deprived of the opportunity to have the appeal determined by a court which has had the benefit of hearing full argument on the submissions.

18 Accordingly, I would grant leave to extend the time to lodge the notice of appeal.

Should the applicants be permitted to amend their notice of appeal?

19 Rule 64.06 of the Rules allows a notice of appeal to be amended at any time, by leave of the court.

20 In considering whether an amendment should be permitted the court balances the prejudice caused to the appellant if amendment were not permitted against any prejudice to the respondent in allowing an amendment.[9]

21 As I have said already, the respondent's submissions relating to the amendment mainly concern the merits of the appeal, rather than the question whether the amendment should be permitted. The amended grounds identify the alleged errors more precisely and in a way which will assist counsel for the respondent and the court hearing the appeal.

22 In my view leave to amend the grounds of appeal should be granted. The redrafted grounds are not so lacking in merit that amendment should be refused and the respondent has not demonstrated that it would be unfairly prejudiced by the amendment.

Should the court grant a stay of execution of the judgment?

23 An appeal does not operate as a stay unless a stay is ordered under Rule 66.16 of the Rules. (See also Rule 64.25.) The court has a broad discretion to stay execution and in doing so is required to take all the circumstances of the case into account. In Cellante v. G. Kallis Industries Pty Ltd[10] the Full Court re-affirmed earlier decisions which held that a stay would only be granted in special or exceptional circumstances.

24 The onus of convincing the court to grant a stay is on the party applying for it.[11] A stay may be granted where failure to stay execution of a judgment would render a successful appeal nugatory.[12] The applicant submits that this is the case because it is unlikely that NPV WA would be able to repay the amount of the judgment if INS and Mr Atherton succeeded in their appeal.

25 The applicant's outline of submissions points to a number of matters which it submits show that INS would not be able to repay the amount of the judgment debt. Mr Hayes drew particular attention to the fact that the respondent company has only $10 in paid up capital, that on 27 June it had a closing balance of $96.12 in its bank account, and that on 12 September it had no real property registered in its name.

26 Exhibits CAC-11 to CAC-15 to the applicant's solicitor's affidavit sworn on 21 September 2006 are said to substantiate this contention. CAC-11 is a bundle of correspondence dealing with payments made in the film financing scheme, which throws little light on NPV WA's solvency. CAC-12 is the cash disbursement journal of NPV W.A., which appears to confirm that payments made to NPV WA are then paid out to investors. CAC-13 in as account for a settlement which shows the amount lodged by an investor and the amount to be paid out to another company, presumably as part of a "round robin" process described in his Honour's judgment. CAC-14 is an extract of the evidence given by Mr Jarrounge, a director of NPV Finance and NPV WA, which deals with aspects of the film financing arrangement. Mr Jarrounge, said in the course of his cross-examination that in 2002 "he had to get money from Mr Atherton's company to pay." CAC-15 indicates that in the period 20 June 2003 - 27 June 2003, some $191,500.00 passed through NPV W.A.'s account.

27 The applicant also submitted that the amounts received by NPV WA under the film financing scheme were regularly paid out to investors, and reference was made in the written outline to a number of exhibits which were said to show that NPV WA paid out everything that it received.

28 It is clear that the nature of the tax minimisation arrangements made between NPV Finance, NPV WA, INS, Mr Atherton and other companies involved various round robin arrangements in which cheques were paid out to companies involved in the scheme and then returned to the original payer. NPV WA provided finance to enable investors to participate in the scheme. The learned trial judge said that -

"the arrangements were such that the investor could be confident that it would eventually recover from the Village group the capital cost initially paid. If the investor used its own funds, the 'cost' of the tax deduction which it was hoped would be obtained would be the time value of the capital expenditure. If the investor used finance available as part of the scheme, the cost of the deduction would be the interest payable, which it was expected would itself be deductible."[13]

29 The exhibits referred to above provide evidence of these arrangements, and Mr Hayes also drew our attention to the large amounts paid out by way of commission to various participants in the scheme. They do not necessarily show, however, that NPV WA was obligated to use moneys derived from the judgment under appeal in order to pay out other investors. Nor do they provide much assistance as to the current financial state of NPV WA.

30 The respondent's outline of argument submits that -

"There is no evidence to warrant the inference that the plaintiff finance company would not be able to repay the judgment if an appeal were to succeed ... "

31 The reason for requiring "exceptional circumstances" before a stay is granted is that "prima facie a successful party is entitled to the benefit of the judgment obtained by him and entitled to commence with the proposition that the judgment is correct".[14] In my view the applicants have not satisfied the onus of showing that a stay should be granted pending the hearing of an appeal. The granting of a stay would deprive NPV WA of the fruits of its judgment for a significant period. While the respondent has not provided up to date financial information, Mr Martindale acknowledged unhesitatingly that a failure by his client to bring to the attention of the Court any current outstanding debts of the kind which could result in disbursement of the judgment moneys would be misleading. He also referred to the affidavit of Mr Kramersh, indicating that there were no outstanding creditors of the scheme, and that the company is not incurring trading debts. For these reasons I am not satisfied that failure to grant a stay would render the appeal nugatory. I would accordingly dismiss the application for an order to stay the execution of the

32 I agree, and I do so for the reasons which her Honour has given. I add briefly some additional reasons of my own in relation only to the question of stay.

33 As her Honour has pointed out, and as I would wish to emphasise, the jurisdiction to grant a stay pending appeal is an exceptional jurisdiction. As we pointed out recently in the matter of IOOF,[15] it will only be exercised where it is shown that the circumstances are truly exceptional.

34 The discussion with Mr Martindale, who appears for a respondent who has in the circumstances chosen not to put on evidence of its current financial position, raised issues relevant to the question dealt with in some of the stay cases, about whether and when the respondent assumes the onus of addressing the question of capacity to repay the judgment if the appeal succeeds. I agree that this is not a case where that onus shifted to the respondent. There is no material which has been put before the Court by the applicants for a stay which by itself raises a question which requires an answer.

35 When asked about his client's failure to put on evidence, Mr Martindale referred to the adverse inference that can be drawn when a party does not adduce evidence which it was clearly capable of adducing. The Jones v Dunkel[16] principle can, it seems to me, have some application in relation to this question. But, as the High Court recently restated in Schellenberg v Tunnel Holdings Pty Ltd,[17] that principle is only engaged where something is raised by the other party which requires an answer.[18] The mere fact that there was evidence which could have been furnished does not by itself justify the drawing of any adverse inference from the failure to file

that evidence. As I have already said, I do not regard the applicants' material as having raised a question which the respondent was obliged to answer by evidence.

36 At the same time, silence by a respondent to an application such as this would mislead the Court if there were circumstances known to that respondent which did create a risk that the judgment sum would not be repaid should the appeal succeed. The paramount obligation of counsel to the Court, which exists at all times, is of the utmost importance. Accordingly, it was notable and commendable, in my opinion, that Mr Martindale unhesitatingly accepted the proposition that we would have been misled had he remained silent about, for example, a debt to a bank which was due for repayment. A judgment needs to be made by the legal advisers to a respondent to an application like this, as to whether remaining silent about the financial position is consistent with the duty of those legal advisers not to mislead the Court.

37 Finally, if a respondent to an appeal, having received the moneys payable on the judgment from the appellant, disposed of those funds in a way which disabled it from repaying the sum should the appeal succeed, the law dealing with dispositions to defraud creditors would be relevant. A respondent who did that would seem to be very much in the same position as a defendant who, having been sued, disposed of assets so as to ensure that any judgment was empty. There is no suggestion whatever of any such thing occurring in this case. I simply make the general point that if an appellant were to succeed and the respondent to say, "Well, the judgment sum has been spent and we are now insolvent", it would be necessary to investigate how and why the respondent had caused or permitted that to occur.

38 The orders of the Court will be as follows:

1. The time for filing the notice of appeal be extended to 24 August 2006.

2. The appellants have leave to file an amended notice of appeal in the form of Exhibit CAC.1 to the affidavit of Cecile Aline Chastre sworn

3 October 2006.

3. The application for a stay of execution is refused.

MR HAYES: Could I ask the Court if it would consider granting a time of 60 days to pay? There has already been an extension of time to pay, but my client will now have to raise the money to be able to pay, and on my instructions 60 days is a realistic period of time.

MAXWELL, P.: Mr Martindale?

MR MARTINDALE: No objection to that.

MAXWELL, P.: The fourth order will be:

4. There be a stay of execution for 60 days from today.

(Discussion ensued as to costs.)

MAXWELL, P.: The order of the Court will be that the appellants pay the respondent's costs of today's hearing and of the applications.

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[1] [2006] VSC 284 at [77].

[2] Ticco Pty Ltd v. Complete Family Healthcare Services Pty Ltd [2005] VSCA 221, although that case dealt with an appeal under s.74(2A) of the County Court Act 1958 to allow an extension of time to appeal from a decision of the County Court, similar considerations are applicable.

[3] [1998] HCA 27; (1998) 195 C.L.R. 516 at 541.

[4] Respondent's outline of submissions at [25].

[5] Jakamarra v. Krakouer [1998] HCA 27; (1998) 195 C.L.R. 516 at 519-522. See also Gummow and Hayne, JJ. at 526-9, Kirby, J. at 540.

[6] Ibid at 520.

[7] Ibid at 519 per Brennan, C.J. and McHugh, J. citing R. v. Secretary for the Home Department; Ex Parte Mehta [1975] 1 W.L.R. 1087 at 1091 per Lord Denning, M.R.

[8] Ibid at 522.

[9] Equuscorp Pty Ltd v. Jackson & Ors, unreported Court of Appeal decision, 29 May 1998, 15 June 1998, proceeding number 6822 of 1997 per Kenny, J.A. at 8.

[10] [1991] VicRp 99; [1991] 2 V.R. 653.

[11] Wells Fargo Bank Northwest National Association v. Victoria Aircraft Leasing Ltd & Ors. (No.2) [2004] VSC 341 at [38]- [43] per Dodds-Streeton, J.

[12] Federal Commissioner of Taxation v. Myer Emporium (No.1) [1986] HCA 13; (1986) 160 C.L.R. 220 at 222-223.

[13] [2006] VSC 284 at [7].

[14] Cellante v Kallis Industries Pty Ltd [1991] VicRp 99; [1991] 2 VR 653 at 655; see also Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] VicRp 9; [1995] 1 VR 150.

[15] IOOF Building Society Pt Ltd v Foxeden Pty Ltd [2006] VSCA 202 at [2].

[16] [1959] HCA 8; (1959) 101 CLR 298.

[17] [2000] HCA 18; (2000) 200 CLR 121.

[18] At 142 [51] per Gleeson, C.J. and McHugh, J.