John McInerney and Phillip Campbell-Wilson in their capacity as liquidators of St Gregory's Armenian School Inc v Michael Ghougassian & Anor

Supreme Court of NSW|2020-03-02|Before: Gleeson J, Mr P

Solicitors: Hegarty Legal (Plaintiffs / Respondents) Robert Balzola & Associates (Defendants / Applicants) File Number(s): 2019/299647

Judgment

GLEESON J: Application is made by the judgment debtors, Michael Ghougassian and Daniel Ghougassian (together the Ghougassians), for a stay of enforcement of a writ for levy of property filed 18 November 2019 until: the order of Emmett AJA in the matter of St Gregory's Armenian School Inc [2018] NSWSC 1022 at [73] as to the application of s 53 of the Associations Incorporation Act 1984 as it was in force at June 2010 being the month of liquidation has been given effect.
Although the proposed form of order is not well expressed, it is to be understood as seeking a stay of enforcement of two writs for levy of property until the surplus in the liquidation of St Gregory's Armenian School Inc (in liq) (the Association) is distributed in accordance with s 53 of the Associations Incorporation Act 1984 (NSW) (the 1984 Act).

Legal principles

The Ghougassians rely upon s 67 of the Civil Procedure Act 2005 (NSW), which provides: 67 Stay of proceedings Subject to rules of court, the court may at any time and from time to time, by order, stay any proceedings before it, either permanently or until a specified day.
This power is exercisable whenever the requirements of justice so demand and is in addition to the Court's inherent powers. The Court has a wide discretion as to whether any terms should be imposed upon such a stay and if so, the nature of those terms such as payment of part of the judgment to the plaintiff or provision of security: see for example, Andrews v John Fairfax & Sons Ltd (1979) 2 NSWLR 184 at 189.
Mention should also be made of s 135(1) of the Civil Procedure Act which provides that the Court may, by order, give directions with respect to the enforcement of its judgments and orders. Among others, the Court may make an order prohibiting the Sheriff from taking any further action on a writ, or prohibiting any person from taking any further action, permanently or until a specified day, to enforce a judgment or order of the Court: s 135(2)(b) and (c), Civil Procedure Act.
The stay of execution on a judgement to give effect to a setoff between two judgment debts is one instance of the control which the Court exercises over its own proceedings: Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd [2006] NSWSC 560; (2006) 58 ACSR 22 (Evans & Tate) at [77] (White J). And the Court may grant a stay of execution effectively amounting to a setoff whether or not the setoff would amount to an equitable setoff: Padkohe Pty Ltd v Fletcher [2006] NSWSC 1239 at [4] (Barrett J); Evans & Tate at [79] (White J).

Grounds of application

The Ghougassians advanced four grounds for the stay. First, that execution of the writs involves the family homes of the two Ghougassians.
Second, that the Ghougassians will be able to pay the judgment once the surplus in the Association is distributed in accordance with s 53 of the 1984 Act.
Third, the costs order made by Emmett AJA should not have been made, and should be set aside under Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 36.15 on the ground that the order was made irregularly or against good faith.
Fourth, execution of the judgment debt should be stayed to give effect to the setoff between the judgment debt and the costs order in favour of Michael Ghougassian (and his wife) in other proceedings (2013/386207) against the liquidators of the Association (the s 1321 proceedings).

(1) Family home point

The first ground has no substance. As indicated, the Sherriff has issued a notice of non-levy in respect of the two addresses at which execution was attempted against the property of the Ghougassians. There is no evidence of any threat of a further attempt at execution of the judgment against any personal property of the Ghougassians.

(2) Imminent payment of judgment

As to the second ground, Michael Ghougassian deposed that he will have "sufficient funds to fully pay out the judgment" once the surplus in the liquidation of the Association is distributed in accordance with s 53 of the 1984 Act. However, there is no credible evidence to support this assertion. And the assertion is contrary to the restriction in s 53(2A)(b) of the 1984 Act which precludes distribution of the surplus to any member of the Association.

(3) Application to set aside costs order

The third ground is based on an application by the Ghougassians under UCPR, r 36.15 to set aside the costs order made by Emmett AJA in the 2015 proceedings. That application which is dated 2 March 2020, was filed in court with leave during the hearing of the stay application, and is returnable in the Corporations Judge's motions list on 23 March 2020. Significantly, that application was not foreshadowed in either the affidavit of Michael Ghougassian or the Ghougassians' written submissions. The application was first mentioned by counsel for the Ghougassians after the close of counsel's oral argument (T10 (1-4)), after an oral submission had been made that the costs order should not have been made. Whether there should be a stay of execution of the judgment debt pending determination of that application is addressed below.

(4) Setoff

The fourth ground relies upon a set off of the judgment debt against the unquantified costs order in favour of Michael Ghougassian (and his wife) in the s 1321 proceedings. Although this ground seemed to have been disavowed in written submissions, it was advanced in oral argument by counsel for the Ghougassians (T10 (4-7)).
The s 1321 proceedings involved an appeal by the Ghougassians under s 1321 of the Corporations Act in respect of decisions of the liquidator of the Association to reject the whole of Michael Ghougassian's proof of debt and part of Daniel Ghougassian's proof of debt. There was also a cross claim brought by the former liquidator against Michael Ghougassian and his wife, Mrs Katrin Ghougassian, in respect of payments made by the Association to Michael Ghougassian and entities associated with him: In the matter of St Gregory's Armenian School Inc [2015] NSWSC 1465.
The result of the s 1321 proceedings was summarised by Black J in his judgment at [275] as follows: Mr Ghougassian has failed and Dr Ghougassian has substantially failed in their applications to set aside the liquidator's decisions in respect of their proofs of debt and the liquidator and SGAS have failed in their CrossClaim. The complexity of the issues in these proceedings may impact on the form of orders necessary to give effect to this judgment, and I will hear the parties in that regard. My preliminary view is that Mr Ghougassian and Dr Ghougassian should, jointly and severally, pay the costs of their unsuccessful applications under s 1321 of the Corporations Act, as agreed or as assessed; the liquidator should pay Mr and Mrs Ghougassian's costs of the CrossClaim, as agreed or as assessed; and there can be no set off between those amounts, other than by agreement of the parties, given the lack of identity of parties to those claims.
On 16 November 2015, Black J made orders in In the matter of St Gregory's Armenian School Inc [2015] NSWSC 1701, which relevantly included: 4. The Plaintiffs jointly and severally pay the liquidator's costs of the Originating Process on the ordinary basis as agreed or as assessed. 5. The Amended Interlocutory Process filed on 5 February 2015 by the liquidator and St Gregory's Armenian School Inc (in liq) and the Points of CrossClaim filed on 12 August 2014 be dismissed. 6. The CrossClaimants pay the CrossDefendants' costs of the CrossClaim on an ordinary basis as agreed or as assessed. 7. The Court directs that the assessment of costs as provided by Orders 4 and 6 be conducted on the basis that at least 75% of the hearing time and preparation time is treated as attributable to the Plaintiffs' claims with the remainder treated as attributable to the CrossClaim.
No steps have been taken by Michael Ghougassian to have the costs order in his favour assessed. In his affidavit sworn 4 December 2019, Michael Ghougassian deposed "I have elected not to take our 25% costs order against the liquidator for its failed cross claim against me, by wasting more time and money in taking this matter to full cost assessment."
An indication of the potential quantum of the costs order in favour of Michael Ghougassian can be gained from the quantum of the costs order in favour of the liquidators in the s 1321 proceedings. The liquidators obtained judgment against the Ghougassians for $320,506.36 on 23 August 2017 in respect of their assessed costs for 75 per cent of the preparation and hearing time in the s 1321 proceedings. The amount of the potential set off for Michael Ghougassian's costs order against the liquidators of the Association in respect of the cross claim in the s 1321 proceedings assessed as 25 per cent of the preparation and hearing time, is unlikely to be more than about $80,000. It may be less.
Therefore, at best, Micahel Ghougassians has a costs order with a potential value of about $80,000 to set off against the judgment for $320,506.36. That assumes favourably for Michael Ghougassian, that he proceeds to have the costs order in his favour assessed.
Unless the determination of the third ground requires a different conclusion (which is addressed below), I consider that the interests of justice are best met by the imposition of a partial stay of the judgment debt for all amounts in excess of $240,000, subject to a condition that Michael Ghougassian undertakes to the court and the liquidators to take all necessary steps to commence and pursue with due expedition the assessment of the costs order in his favour in the s 1321 proceedings.

Whether arguable claim to set aside the costs order in the 2015 proceedings?

UCPR, r 36.15(1) provides: 36.15 General power to set aside judgment or order (1) A judgment or order of the court in any proceedings may, on sufficient cause being shown, be set aside by order of the court if the judgment was given or entered, or the order was made, irregularly, illegally or against good faith. …
The claim by the Ghougassians that the costs order made by Emmett AJA in the 2015 proceedings was obtained against good faith, directs attention the circumstances in which the costs order was made.

Reasons of Emmett AJA

His Honour gave the following reasons for refusing the application to terminate the winding up of the Association: [41] The School ceased operating when the winding up order was made and the Association has not resumed the conduct of a school. It has been more than eight years since the Association ceased conducting the School and all of the Association's property has now been realised and converted into money. There is, therefore, no present operational undertaking of the Association in existence. … [46] The above evidence indicates that, while there are proposals in existence for the establishment of an Armenian school, neither of the proposals appears to be feasible at present. Doubtless the surplus that is likely to arise upon the final winding up of the Association would be of assistance in the establishment of such a school if it were available for that purpose. However, under the regime established by the 1984 Act, that would be a matter for the approval of the Director General, a matter that is not presently before the Court. In effect, Michael and Daniel seek to bypass the operation of s 53 of the 1984 Act. The orders sought by them in the present application represent a substitute for the final winding up of the affairs of the Association and its dissolution. … [48] I do not consider that it is the function of s 482 of the Corporations Act or its predecessors to bring to an end, by stay or termination order, the winding up process when it is virtually complete. That appears to be the object of the present application. It has not been suggested by Michael and Daniel that there are no members of the Association who could pass a resolution under s 53(2) of the 1984 Act. [49] As I have said, the Association has nothing but money. It has no undertaking. While it engaged in the not for profit enterprise of conducting the School, the School no longer exists. There is no physical school building. There are no teachers. There are no pupils. In the circumstances, I do not consider that this is an appropriate case in which to make an order under s 482. Certainly, s 482 refers to an application being made "at any time". Nevertheless, having regard to the stage that has been reached in the winding up of the Association, I do not consider that it is appropriate to make any order under s 482.
Thus, his Honour concluded that the Ghougassians had not made out a positive case for the favourable exercise of the Court's discretion to terminate the winding up of the Association. His Honour observed at [52] that "the winding up of the Association is almost complete and there is no undertaking to return to the members and directors, simply a fund of money".
As to the interests of contributories, after observing that the Association is not a company and there are no shareholders and no contributories, his Honour observed at [55]: … there has been no evidence as to who the members of the Association are or whether any members, other than Michael and Daniel, assuming they are members, support or oppose the making of an order for a stay or termination of the winding up of the Association.
His Honour then turned to the broader question of the public interest and in particular, whether it would be reasonable to entrust the affairs of the Association to the directors under whose management it previously failed, referring to Re Data Homes Pty Ltd (1972) 2 NSWLR 22 at [26]. After giving reasons for why he was not favourably impressed by the evidence given by either Michael Ghougassian or Daniel Ghougassian, his Honour noted at [65] that reports filed under s 533 of the Corporations Act with the Director-General detailed various contraventions of s 530A and s 530B(3) of the Corporations Act, among others, and noted at [66] that the reports constitute a somewhat critical picture of the management of the Association by the Ghougassians and their lack of cooperation with the liquidators from the time of the winding up.
His Honour continued at [68]-[69]: [68] As I have indicated, it is clear that there will be a significant surplus available for distribution when the winding up is complete. There are adequate funds to pay all creditors in full whose proofs have been admitted. To that extent, the Association now has liquid assets that exceed its liabilities. However, that position has been achieved because of the winding up. Clearly, at the time of the winding up, the Association was unable to pay its debts as and when they fell due. It was clearly insolvent. At the time of the winding up, the undertaking of the Association had stalled. There were only six pupils, most of whom were relatives of Michael and Daniel. The Association had been insolvent for some time and it was clearly not a viable, going concern. The fact that, following the realisation of its capital assets, all of its creditors will be paid in full, is not to the point. [69] The Association has no premises from which to operate a school and there is no evidence that there would be any substantial body of pupils who would be in a position to pay fees to support the ongoing viability of such a school. No realistic explanation has been put forward by Michael and Daniel as to how the Association could recommence operating a school in a manner that would give any comfort as to the security of future creditors. For example, one might have expected to see estimates of capital expenditure required to establish a school together with cash flow projections of income to support the expenses of conducting a school. No such evidence has been adduced. [Emphasis added]
His Honour also accepted at [71] a submission by the liquidator that the Ghougassians did not appear to keep adequate records of the amounts they lent or of repayments by the Association, before expressing the conclusion at [73], which is reproduced above at [6].

Submissions

Counsel for the Ghougassians submitted that the costs order should never have been made because the then liquidator of the Association, Mr Arnautovic, failed to disclose in the 2015 proceedings that he had informed the Secretary, New South Wales Fair Trading in February 2018 of the existence of a surplus in the liquidation and had sought confirmation or comments on the proposed process with respect to distribution of the surplus, which included an application to the court under s 488(2) of the Corporations Act for approval to distribute the surplus.
The submission continued that if this surplus and the proposed application to the court had been disclosed by the liquidator in the 2015 proceedings, then the Ghougassians would have embraced that approach. The implicit premise of the submission is that the Ghougassians would not have pursued their application to terminate the winding up of the Association at the hearing of the 2015 proceedings before Emmett AJA in April and June 2018.

Analysis

The application by the Ghougassians for a stay of execution of the judgment pending the outcome of the application to set aside the costs order in the 2015 proceedings, raises considerations analogous to the grant of a stay pending an appeal. In the latter context, the relevant principles are referred to in Alexander v Cambridge Credit Corp Ltd (1985) 2 NSWLR 685 at 694 and Kalifair Pty Ltd v Digi-tech (Australia) Ltd (2002) 55 NSWLR 737; [2002] NSWSC 383.
Whilst it is appropriate to proceed on the basis of not speculating upon the Ghougassians' prospect of success on the application to set aside the costs order, it is necessary to make some preliminary assessment about whether they have an arguable case to set aside the costs order to exclude an application to set aside a cost order lodged without any real prospect of success simply to gain time.

(1) Irregularly

The authors of Ritchie's Uniform Civil Procedure NSW state at [36.05.10] that, aside from illegality, which is not relied upon here, the concept of irregularity includes contravention of, or non-compliance with, specific provisions governing the making or entering of a judgment or order. Nothing of this type was relied upon by the Ghougassians in support of the stay application.
Ritchie's also states, citing Re Barrell Enterprises [1972] 3 All ER 631; [1973] 1 WLR 19, that the concept of irregularity does not apply where a judgment is sought to be challenged on the basis of the discovery of fresh evidence; in such a case, an appeal is the appropriate procedural course. Re Barrell Enterprises involved an unsuccessful appeal against the refusal of the Vice-Chancellor to set aside a contempt order, relying upon fresh evidence.
On the material relied upon on this application, there is no arguable claim that the costs order in the 2015 proceedings was made irregularly.

(2) Against good faith

The "against good faith" ground operates only on circumstances as at the time of the judgment, as opposed to those existing when an opposition to the judgment subsequently arises: Kendell v Carnegie (2006) 68 NSWLR 193; [2006] NSWCA 302 at [52] (Bryson JA, Hodgson and McColl JJA agreeing). As to the concept of "against good faith", Bryson JA remarked at [60]: There is not and could not, I would think, ever be an exhaustive judicial definition of what is against good faith; only very broad limits are set by proceeding by analogy from circumstances in which judicial remedies are based on good faith, unconscionability, or other concepts closely related to good faith. ...
The letter from the liquidators' solicitor to the Secretary dated 27 February 2018 sought agreement as to the course proposed by the liquidators around the distribution of the surplus. The letter noted that the liquidators were unable to finalise the liquidation and distribute any surplus funds until the current litigation in the Supreme Court and the Federal Court had concluded, including any appeals. The letter referred to the requirement that any distribution of surplus property be approved by the Director-General under s 53 of the 1984 Act and set out the process proposed to be adopted by the liquidators to determine the appropriate recipient of the surplus and subsequently effect the distribution. That process included seeking approval of the court on the basis that it was "arguable" that a liquidator can only distribute surplus with the "special leave" of the court under s 488(2) of the Corporations Act. The letter reiterated that it was not currently proposed that this process commence until all current litigation, including any appeals have concluded, and noted that the ongoing litigation may not resolve for several years. The letter sought the Secretary's feedback on the proposed process for the distribution of the surplus.
The email response on behalf of the Secretary dated 6 June 2019 indicated agreement that the surplus should be distributed to an organisation with "similar objects" not carried on for profitable gain for individual members. This email post-dated the judgment of Emmett AJA and could not as such be relied upon as "fresh" evidence on an application to set aside the costs order.
As to the so-called "fresh" evidence based on the liquidator's solicitor's letter of 27 February 2018, the following observations should be made.
First, the 2015 proceedings commenced well before and had a long history before the liquidator's letter of 27 February 2018 concerning the proposed process for distribution of the surplus. The relief sought by the Ghougassians in the originating process was directed to various matters in addition to relief under s 482 of the Corporations Act that the winding up of the Association be terminated. Costs associated with the 2015 proceedings were incurred before the alleged non-disclosure by the liquidator of the surplus and his intentions with respect to seeking court approval for distribution of the surplus.
Second, there is no merit in the suggestion that the Ghougassians were unaware of the likely surplus in the liquidation of the Association at the time of the hearing of the 2015 proceedings in April and June 2018. It is convenient to reproduce again part of the reasons of Emmett AJA at [68]: As I have indicated, it is clear that there will be a significant surplus available for distribution when the winding up is complete. There are adequate funds to pay all creditors in full whose proofs have been admitted. To that extent, the Association now has liquid assets that exceed its liabilities.
Third, the essential reason given by Emmett AJA for refusing to terminate the winding up of the Association was that it was not appropriate to make any order under s 482 of the Corporations Act because the winding up of the Association was almost complete and there was no undertaking to be returned to members and directors, simply a fund of money. This was the context in which the liquidator Mr Arnatovic opposed the relief sought by the Ghougassians in the 2015 proceedings.
It would have been plain to the Ghougassians that once the various proceedings between the parties, including any appeals, had been determined, the remaining step in the liquidation would be the distribution of the surplus, subject to the approval of the Director-General under s 53 of the 1984 Act. That the liquidator also intended to seek court approval for the any proposed distribution on the basis that it was arguable that "special leave" was required under s 488(2) of the Corporations Act, did not change the context in which the liquidator opposed the relief sought by the Ghougassians in the 2015 proceedings.
I do not consider it arguable that the absence of reference by the liquidator to the proposed process of distribution (assuming that to be the case) in the 2015 proceedings, involved some form of sharp practice or unconscionability or absence of good faith, when opposing the Ghougassians' application to terminate the winding up of the Association.
Fourth, and related to the previous point, the evidence on this application provides no support for the proposition that the Ghougassians would have acted differently in the 2015 proceedings, had they been apprised of the so-called "fresh" evidence. The object of the 2015 proceedings, it will be recalled, was an order terminating the winding up of the Association and appointing five persons, including the Ghougassians as directors of the Association. That relief was sought with a view to the Association resuming carrying on business as a school. The relief pursued by the Ghougassians in the 2015 proceedings was antithetical to distribution of the surplus in accordance with s 53 of the 1984 Act.
Fifth, that the liquidator Mr Aarnatovic intended after all litigation had concluded to seek court approval under s 488(2) of the Corporations Act for the distribution of the surplus was disclosed in his subsequent report to creditors dated 12 November 2018, after the determination of the 2015 proceedings, which Michael Ghougassian annexed to his affidavit in support of the stay application. Mr Arnatovic informed creditors of the likely surplus in the liquidation and the proposed application to the court as follows: Distribution of Surplus Funds As advised in our previous reports, it is likely that there will be a surplus of funds available in the Liquidation of the Association after all other creditor claims have been paid (with interest where applicable). These funds will be distributed in accordance with the provisions of the Associations Incorporation Act 1984 subject to the approval of the Director-General of NSW Fair Trading, or otherwise as the Court directs. In my capacity as the Official Liquidator of the Association, should a surplus eventuate, it is my intention to make an application to the Court to determine where these funds should be distributed. I do not consider that there is an arguable claim that the costs order in the 2015 proceedings was made against good faith.
The absence of evidence on the present application of any complaint, let alone any contemporaneous complaint, by the Ghougassians that this information in the report to creditors came as a surprise to them in November 2015, and they would not have pursued the 2015 proceedings had they known of this information, is telling. The submission to the contrary by counsel for the Ghougassinas, is entirely unpersuasive at the level of an arguable claim that the costs order was made against good faith.
In my view, there is no arguable claim to set aside the costs order in the 2015 proceedings either on the ground that the order was made irregularly or against good faith.

Conclusion and Orders

The interests of justice will be best met if there is a partial stay of execution on the judgment dated 27 September 2019 for all amounts in excess of $240,000, subject to the condition referred to above at [32].
As to costs, each party has had a measure of success on the motion, albeit the Ghougassians' success is more limited than that of the liquidators. Nonetheless, I consider the appropriate order is that there be no order for costs on the motion.
The Court orders that: 1. Subject to the first defendant undertaking to the Court and to the plaintiffs to take all necessary steps to commence and pursue with due expedition the assessment of the costs order in his favour in proceedings 2013/386207, being order 6 made on 16 November 2015, order that execution on the judgment dated 27 September 2019 for all amounts in excess of $240,000 be stayed pending the assessment of the costs order in proceedings 2013/386207 or earlier further order. 2. There be no order as to costs of the applicants' notice of motion filed 5 *December 2019.

Amendments 10 March 2020 - Amendment made to appearances 17 March 2020 - Amendment made to jurisdiction - not visible 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: 17 March 2020

Associations Incorporation Act 1984(NSW)s 53

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