The plaintiffs (Berna Karadag and Haluk Karadag) own 50% of the share capital of the first defendant, Samkara Holdings Pty Ltd (Samkara Holdings) (now apparently de-registered). The other 50% shareholder of Samkara Holdings is the second defendant, Mr Steven Murabito. The third defendant, Mr Lupco Stojcevski, is Mr Murabito's brother‑in‑law. Mr Murabito and Mr Stojcevski are the directors of Samkara Holdings. A significant (as I understand it, the only significant asset) of Samkara Holdings was a commercial property in Five Dock, which was the subject of a mortgage to National Australia Bank (NAB). The plaintiffs' estimate of the value of that property was $3 million.
In late 2019, a dispute arose between the plaintiffs and, relevantly, the first and second defendants. The plaintiffs, who had formerly been directors of Samkara Holdings became aware that they had been removed as directors of the company and that a caveat had been placed over the Five Dock property by the now fourth defendant (Peter Karbone), claiming an interest pursuant to an equitable mortgage over the Five Dock property. Meanwhile the plaintiffs had lodged their own caveat over the Five Dock property claiming a beneficial interest in the land pursuant to a constructive trust in a share proportionate to their contribution to the purchase price of the land.
On 3 December 2019, the plaintiffs commenced proceedings against the second and third defendants (Mr Murabito and Mr Stojcevski), in which they sought the winding‑up of Samkara Holdings on the just and equitable ground or on the ground of oppression.
On 23 December 2019, application was made by Samkara Holdings for the issue of a lapsing notice in relation to the caveat that had been lodged by the plaintiffs; and a lapsing notice was issued on 6 January 2020.
An application was then made by the plaintiffs for an extension of their caveat; and, on 29 January 2020, by consent and without admissions (and on the plaintiffs' usual undertaking as to damages), the plaintiffs' caveat was extended until further order.
The winding-up proceedings were settled by a Deed of Settlement and Release entered into on 3 May 2020 (Deed). The Deed recited, inter alia, that the plaintiffs complained of lack of access to financial information (which Mr Murabito and Mr Stojcevski denied); that the defendants rejected the plaintiffs' complaint of oppression; and that the plaintiffs in substance were seeking to withdraw from the company.
[2]
Deed
The Deed, on a without admissions basis, provided for Mr Murabito and Mr Stojcevski to purchase the plaintiffs' shares in Samkara Holdings and the plaintiffs' interests in the Karasam Trust (of which Samkara Holdings is the trustee) at the price determined pursuant to the Deed. Clause 2 of the Deed provided that the purchase price was to be the combined fair value of the said shares and interests "on a net asset backing valuation basis, i.e., fair market value of the Company's assets, less the amount of its liabilities".
Under the Deed, each of the plaintiffs and Mr Murabito and Mr Stojcevski agreed to appoint a valuer of the shares and interests (cl 3); and set out the process by which that was to occur (see cll 4-13). Clause 14 of the Deed provided that:
14. The determination so made by the valuer shall be the value of the whole of the shares in the Company and interests in the Trust and one half of that amount shall be the purchase price payable for the plaintiffs' shares and the plaintiffs' interests in the Trust (the "Purchase Price"). The valuer's determination is binding on the parties, both as to:
(a) The value of the shares and interests in the trusts; and
(b) The value of the assets and liabilities held by the Company (whether in its own right or as trustee) and the valuer is however instructed to accept, that the amount owed by the Company to the Plaintiffs is $325,563.45. The valuer is instructed to accept that beyond the initial subscription of $100.00 for units, and beyond the par value of the issued shares in the company, all sums advanced to or for the benefit of the company or the Trust by any shareholder or unitholder have been advanced as a creditor and not by way of subscription for additional units in the Trust or additional shares in the Company.
Clause 15 of the Deed provided that, within 70 days of the valuer making the determination in cl 14, the second and third defendants were to pay to the plaintiffs the sum of $325,563.45 and the Purchase Price pursuant to cl 14(a); and to cause certain guarantees given by the plaintiffs to ING Bank (effectively, NAB) to be discharged or released at the same time.
Relevant to the dispute which subsequently arose, cl 18 provided that:
18. If payment of the Purchase Price is not tendered within 70 days of the valuer's determination, the parties agree that the said purchase and repayment of its said debt by the Second and Third Defendants shall not proceed, and instead the land owned by the Company will be sold by the Company.
[3]
Dispute as to process by which valuer was to be retained
What followed, after the dismissal of the earlier proceedings in accordance with the Deed, was that there was a dispute between the parties as to the process by which the valuer was to be retained (the position of the plaintiffs apparently being that the individual shareholders should retain the valuer; and the position of the first to third defendants being that the company should retain the valuer); with some unfortunate correspondence passing between the parties' representatives and the agreed valuer, and with the result that by the time of the application before me (and for all I know even now) the valuation process has not properly been commenced (let alone been completed), the purchase price has therefore not been determined (and the time within which the purchase price was to be tendered has not yet arrived). Thus, the provision for the sale of the Five Dock property (in lieu of the agreed purchase and repayment of the debt) was not (on its face) enlivened.
Meanwhile or at about the same time, there seems to have been an issue as to the meeting of mortgage repayments in respect of the Five Dock property; and, on 2 February 2021, ING Bank (Australia) Ltd, as mortgagor, appointed an external controller (Mr Timothy Ross Sherrard) to the Five Dock property. The property was then listed for an on-line action on 31 August 2021. Prior to the auction (the plaintiffs complain this was without the plaintiffs' prior knowledge), the Five Dock property was sold, by way of private treaty, to Artos Espresso Pty Ltd (Artos Espresso), the then tenant of the property and now sixth defendant, for the sum of $2.2 million (a price which the plaintiffs maintain is an undervalue and about which much suspicion has been cast).
[4]
Present proceedings
Fresh proceedings were then commenced, ex parte, by the plaintiffs, with the matter coming before Kunc J in the duty list on 9 September 2021. As I understand it (see the transcript of the proceedings on 15 September 2021 at T 11.41-45), at the time that the fresh proceedings were commenced, the plaintiffs were not aware that the Five Dock property had in fact already been sold. Once the plaintiffs became aware of that sale (through these proceedings) what the plaintiffs sought to do was to restrain the distribution of the sale proceeds, originally by obtaining injunctive relief against the second and third defendants (Mr Murabito and Mr Stojcevski).
When the matter first came before Kunc J, his Honour made orders bringing the matter back before him in the duty list on 10 September 2021, on which occasion the first to third defendants were represented. His Honour granted leave pursuant to ss 236 and 237 of the Corporations Act 2001 (Cth) for the plaintiffs to bring proceedings for interim relief on behalf of Samkara Holdings and granted interlocutory relief, including an order restraining the first to third defendants from transferring, encumbering or otherwise dealing with the net proceeds of sale in respect of the Five Dock property until 5pm on 15 September 2021. His Honour also ordered that Samkara Holdings comply, by 14 September 2021, with a notice to produce dated 10 September 2021; made directions for the filing and service by 13 September 2021 of any motion to stay these proceedings; and listed the matter before the duty judge on 15 September 2021.
The matter then came before me, as duty judge, on 15 September 2021, on which occasion I gave leave for the filing of the amended summons and for the joinder of two additional defendants to the proceedings (the fourth defendant, Mr Peter Karbone; and the fifth defendant, Ms Bosilka Stojcevska, who is the mother-in-law of Mr Murabito). The joinder of those defendants and amendment of the summons was expressly on the basis that this was without prejudice to the existing defendants' ability to pursue their claim for a stay of the proceedings as against them pending compliance with the arbitration procedure in the Deed.
The plaintiffs submitted that there were serious questions to be tried in respect of the question of the validity of the sale of the subject property and, more importantly, the distribution of the sale proceeds. Relevantly, the plaintiffs' complaint was that the settlement sheet showed that a sum of $475,000 was paid to Mr Karbone (who, it will be recalled, had lodged a caveat on the title to the property claiming an interest by way of equitable mortgage), and their evidence was that they had no knowledge as to why a debt by Samkara Holdings would have been incurred to Mr Karbone. Similarly, complaint was made that the settlement sheet recorded that a sum of $552,000 was paid to Ms Stojcevska and the plaintiffs said they were not aware of any reason why Ms Stojcevska would be a creditor of Samkara Holdings.
[5]
Stay application
It was against this background that the stay application was heard by me on 15 October 2021. At the conclusion of the hearing of that application, I reserved judgment but referred the plaintiffs and first to third defendants to mediation (the plaintiffs agreeing that this would count as mediation pursuant to cl 37 of the Deed) such mediation to take place before 1 November 2021. Further, among other orders, I extended the freezing orders to 2 November 2021; and listed the matter for directions on that date. I noted that a privilege dispute in relation to documents was deferred pending a ruling on the motion for a stay of the proceedings.
Pausing here, the first to third defendants' position from the outset was that they were happy for the valuation procedure to proceed (albeit belatedly); and they maintained (as I explain below) that once the valuation process proceeded then (assuming the purchase price so determined was paid) much (if not all) of the complaints now made by the plaintiffs would fall away.
Since then, as adverted to above, the orders for mediation have been extended (with no little reluctance by me) on successive occasions, although it appears that a mediation has at least commenced (albeit not completed by the date of the finalisation of this judgment).
[6]
Statement of claim
The statement of claim was forwarded to my associate on 1 November 2021. The relief there sought is as follows: first, leave pursuant to ss 236 and 237 of the Corporations Act for the plaintiffs to bring the proceedings on behalf of Samkara Holdings (the first defendant) (prayer 1); second, declaratory and other relief (including a claim for equitable compensation) in relation to the proceeds of sale of the Five Dock property (prayers 2-4); third, relief pursuant to s 37A of the Conveyancing Act 1919 (NSW) in relation to the transfer of the Five Dock property and the mortgages affecting that property (prayers 5-13); and, finally, other relief in relation to interest and costs.
The pleading identifies the parties to the proceedings (at [1]-[8]); the Five Dock property (at [9]-[12]); and the "Stojcevska Equitable Mortgage", granted on or about 30 March 2021 purportedly securing a loan in the amount of $472,000. It is alleged that at no time did Mr Stojcevski (the third defendant) and/or Ms Stojcevska (the fifth defendant) advance any funds to or for the benefit of Samkara Holdings (at [13]-[17]). The pleading also identifies the "Karbone Equitable Mortgage" granted on 13 September 2019 over the property purportedly securing a loan from Mr Karbone (the fourth defendant) of $250,000; alleges that at no time did Mr Karbone advance any funds to or for the benefit of Samkara Holdings; and refers to the caveat lodged by Mr Karbone in relation thereto (at [18]-[27]). The pleading also refers to the order made on 29 January 2020 extending the caveat lodged by the plaintiffs, of which it is alleged that the first to third defendants were aware (at [28]-[33]).
The pleading then goes on to allege conduct amounting to deceit of the ING Bank (as to the circumstances in which it agreed not to proceed with a public auction of the Five Dock property scheduled for 31 August 2021) (at [34]-[52]); the removal of the plaintiffs' caveat over the Five Dock Property (after an order was made dismissing the winding up proceedings in relation to Samkara Holdings) (at [53]-[59]); the lodgement by the second defendant (Mr Murabito) of a caveat over the property claiming a beneficial interest in the land on constructive trust for the caveator on a share proportionate to the caveator's contribution to the purchase price of the land (at [60]-[62]).
Next, the pleading contains allegations as to the transfer of the Five Dock Property on 6 September 2021 to Artos Espresso (the sixth defendant) (at [63]-[70]); funds transferred or loans made to Artos Espresso by Mr Karbone out of the funds paid to him in settlement of the transfer and discharge of the Karbone Equitable Mortgage (at [71]); and the grant of further mortgages over the property (the Artos - Karbone Equitable Mortgage and Artos - Stojcevska Equitable Mortgage) and related matters (at [72]-[78]).
[7]
First to third defendants' submissions
As noted, the Court has been informed that the first defendant has now been de-registered. Nevertheless, I here record the submissions made by the first to third defendants before such de-registration.
The first to third defendants seek an order for the stay of this proceeding pursuant to s 8 of the Commercial Arbitration Act, which provides (in mandatory terms) that:
8. Arbitration agreement and substantive claim before court
(cf Model Law Art 8)
(1) A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests not later than when submitting the party's first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.
(2) Where an action referred to in subsection (1) has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.
The first to third defendants also seek the stay in the inherent jurisdiction of the Court (as I explain below). The first to third defendants point out that they first moved (orally) for a stay when the matter was before Kunc J on 10 September 2021; and that they filed the formal notice of motion on 13 September 2021 pursuant to his Honour's directions. It is noted that, since the notice of motion was filed, the summons has twice been amended.
Insofar as the plaintiffs, in their submissions filed on 11 October 2021, have identified two grounds of opposition to the stay (first, that the matter is outside the scope of the arbitration agreement; and second, that a stay would be premature) the first to third defendants respond to those submissions as follows.
[8]
The arbitration clause
The first to third defendants note that the Recitals to the Deed set out the history of the dispute between the parties thereto; and identify the parties' objectives (pointing to the fact that the settlement terminated a winding up suit on the just and equitable and oppression grounds; and that the expressed objective of the plaintiffs (Recital D) was to withdraw their investment in the company).
As to the mediation and arbitration clauses in question, the first to third defendants point to the breadth of the expression "arising out of", and its consideration in numerous cases, citing Comandate Marine Corp v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45; [2006] FCAFC 192 (Comandate) at [162]-[187] where claims asserting a pre-contractual misrepresentation were held to be claims arising out of the formation of the time charter which contained the relevant arbitration clause and to be included in the phrase "all disputes arising out of this contract" (see per Allsop J, as his Honour then was, at [164]-[165]). It is noted that, in Comandate (at [175]), his Honour cited with approval the views of Hirst J in Ethiopian Oilseeds and Pulses Export Corporation v Rio del Mar Foods Inc [1990] 1 Lloyd's Rep 86 at 97 and Gleeson CJ in Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd (1996) 39 NSWLR 160 (Francis Travel) to the effect that the phrase "arising out of a contract" can be equated with "arising in connection with".
The first to third defendants point out that even if (which they say is incorrect) the scope of the arbitration clause is confined to disputes in relation to the two particular subjects provided for in the Deed (i.e., is read in effect as "under the terms of the Deed") or, in the alternative. the winding up of the company, the plaintiffs' summons seeks relief in respect of each of those subjects.
It is submitted that, to confine the relevant clause to a dispute "under the terms of the Deed" is too narrow a construction of ACICA's standard form mediation followed by arbitration clause (which it is said must be taken to be intended for wide and general use and as intended to have a broad reach). Reference is made in this regard to the statement of principles by Bell P, as his Honour then was, in Lepcanfin Pty Ltd v Lepfin Pty Ltd [2020] NSWCA 155 (at [82]-[93]). It is further noted that in Australian Heath & Nutrition Association Ltd v Hive Marketing Group Pty Ltd (2019) 99 NSWLR 419; [2019] NSWCA 61 (Australian Health v Hive Marketing) at [50]-[51], his Honour described an exclusive jurisdiction clause applying to "all disputes arising out of or in connection with this Agreement" as "extremely broadly drawn". Similarly, it is noted that, in Inghams Enterprises Pty Ltd v Hannigan (2020) 379 ALR 196; [2020] NSWCA 82, Meagher JA said at [128], in relation to a mediation clause applying to "a dispute arising out of this Agreement", that:
The rational assumption of a reasonable person in the position of the parties would be that the provisions of this clause should apply to all of the disputes relating to their agreement. Approaching the construction of this overriding provision by reference to such an assumption is merely an application of the objective theory of contract.
[9]
Is the stay premature?
As to whether the stay is premature, the first to third defendants emphasise the mandatory nature of s 8 and say that a party invoking the Court's jurisdiction to exercise the s 8 power is entitled to have its application heard and determined in the ordinary way as soon as the business of the Court will permit and the application is ready (referring in this context also to ss 56-60 of the Civil Procedure Act 2005 (NSW)).
The first to third defendants say that the "end point" of the Deed is a payment of money by the second and third defendants (provided that there are sufficient assets, referring to cl 17) and it is therefore counterproductive for the plaintiffs to be suing the company and exposing it to costs (I interpose here to say that of course in an oppression suit it may well be that the company ought not bear any such costs).
In any event it is said that it is incumbent on the plaintiffs to demonstrate some principled reason on which the application may lawfully and appropriately be adjourned (rather than some broad appeal to discretion or convenience, even if the specific features of s 8 were not present).
Insofar as the plaintiffs have issued notices to produce and subpoenas to obtain documents concerning the sale of the Five Dock property including for the purpose of determining whether to apply for the current interlocutory relief to be extended to any additional party (as per their submissions), the first to third defendants say that this is a fishing expedition and an abuse of process (and that, among other things, it presupposes the outcome of the stay applications).
The first to third defendants contend that the present proceeding does not involve any aspect of an application for interim measures under s 17J of the Commercial Arbitration Act (which power is confined by it being in relation to arbitration proceedings) and by reference to the definition of "interim measures" (and confined to orders to "a party"). The first to third defendants note that s 17J requires the power to be exercised taking into account the specific features of a domestic commercial arbitration (which the first to third defendants say would include consideration of matters such as confidentiality, the parties' agreement to conduct their dispute through arbitration, the availability of power in the arbitrator to make interim measures, and the principle that it is the arbitrator who should control the arbitral proceedings).
[10]
Plaintiffs' submissions
As to what is the relevant "matter" for the purposes of s 8 of the Commercial Arbitration Act, the plaintiffs say that they are here seeking to bring a derivative action on behalf of Samkara Holdings against its directors (Mr Murabito and Mr Stojcevski) for breaches of their fiduciary duties in the sale of the Five Dock property; including allegations that the second and third defendants caused Samkara Holdings to sell the property at an undervalue and that they caused substantial portions of the proceeds of sale to be disbursed to Mr Karbone and Ms Stojcevska (ostensibly as secured creditors) when in fact neither Mr Karbone nor Ms Stojcevska had advanced any funds to Samkara Holdings and neither had any entitlement to payment out of the proceeds.
The plaintiffs accept that cll 37 and 38 of the Deed constitute an arbitration agreement within the meaning of the Commercial Arbitration Act. They say that whether the present matter is the subject of cll 37 and 38 is a question of construction and point to the authorities as to the applicable principles relating to the construction of a commercial contract, namely that it is to be construed by reference to the language used by the parties, the surrounding circumstances, and the purposes and objects to be secured by the contract (citing Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at 656-657 [35] per French CJ, Hayne, Crennan and Kiefel JJ) and noting that these principles apply to the construction of dispute resolution clauses and arbitration agreements (citing Hancock Prospecting at [44] per Kiefel CJ, Gageler, Nettle and Gordon JJ).
As did the first to third defendants, the plaintiffs point to the Recitals, from which they accept that the purposes and objects to be secured by the Deed were to enable the plaintiffs to withdraw from their investment in Samkara Holdings and to settle all disputes between the parties arising out of earlier corporations list proceedings. The plaintiffs note that the Recitals further record that the plaintiffs complained that they had been denied access to financial information and the first to third defendants rejected that complaint.
The plaintiffs maintain that the disputes between the parties at the time of the earlier proceedings were as to the issue of access to records; and that the plaintiffs had discovered that, without their knowledge or consent, Samkara Holdings had given equitable mortgages to two unknown companies and the plaintiffs had been removed as directors (and Mr Stojcevski had been appointed a director) of Samkara Holdings. It is said that the plaintiffs' submissions in the earlier proceedings also canvassed other issues going to the breakdown in relationship between the parties and doubts about the solvency of the company; and that the first to third defendants disputed many of the factual allegations and submitted that, rather than winding up the company, a valuation and compulsory purchase of the plaintiffs' shares should be directed with any disputes about fair value to be determined in arbitration (it is said that the first to third defendants made an open offer to that effect).
[11]
The dispute resolution clauses
The dispute resolutions clauses (cll 37 and 38) have been set out above. The plaintiffs note that the operative words are:
Any dispute, controversy or claim arising out of, relating to or in connection with this contract, including any question regarding its existence, validity or termination…
The plaintiffs say, first, that the "matter" is not subject to the arbitration agreement contained in the Deed. The plaintiffs say that (notwithstanding the breadth of the words "arising out of, relating to or in connection with this contract" in the dispute resolution clauses) the background, surrounding circumstances and purposes and objects which the Deed was intended to secure all make plain that the arbitration agreement was intended to cover disputes arising out of, or in relation to, the valuation of the plaintiffs' shares in Samkara Holdings and the purchase of those shares under the terms of the Deed or, in the alternative, the winding up of the company. They submit that there is no contextual reason why the parties would have intended a dispute arising subsequently between them (said to be wholly outside of the exercise of any right or obligation under the Deed) to be subject to the dispute resolution clauses in that agreement. It is said that the present case is unlike that in Hancock Prospecting, in that, here, there are no broader considerations of the confidential resolution of all disputes between the parties for reasons of commercial certainty or otherwise at play (I note that the first to third defendants cavil with that proposition insofar as they point to the less public nature of resolution of disputes in accordance with mediation and arbitration clauses).
The plaintiffs argue that the arbitration agreement was intended to apply to disputes relating to the processes set out in the Deed for the plaintiffs to withdraw their investment in Samkara Holdings; contrasting this with the claims in the present matter for breaches of fiduciary duty which they say exist entirely independently of the contract. Complaint is made that the sale of the Five Dock property was conducted outside of the processes stipulated by the Deed and was not done pursuant to, or in the fulfilment of, any obligation or right arising under the agreement. The plaintiffs say that the present dispute about whether the sale was at an undervalue or whether the proceeds were dispersed in breach of fiduciary duty to persons purporting to be secured creditors bears no relation to the subject matter of the Deed because the sale was not conducted under the contract. (It is said that the situation might be different if the second and third defendants had undertaken the sale in the furtherance of the processes under the Deed but that is not what occurred.)
[12]
Determination
I had cause to consider the relevant provisions of the Commercial Arbitration Act in Rinehart v Rinehart [2020] NSWSC 68. In summary, s 5 of the Commercial Arbitration Act provides that "[i]n matters governed by this Act, no court must intervene except where so provided by this Act". Section 8(1) of the Commercial Arbitration Act, which is also mandatory in its terms, has been extracted above.
There is no dispute here that cll 37 and 38 of the Deed amount to a valid arbitration agreement.
If there is an apparently valid arbitration agreement and an action has been brought in a matter the subject of that arbitration agreement, then referral to arbitration is mandatory pursuant to s 8(1) of the Commercial Arbitration Act (assuming that the matter is arbitrable) and the proceeding should be stayed. In HPPL v Rinehart FFC, the Full Court of the Federal Court made clear that the court does not act as a filter as to the suitability of a matter to be referred to arbitration.
In determining whether an action has been brought in a matter that is the subject of an arbitration agreement, it is necessary to construe the relevant arbitration agreement; characterise the "matter"; determine whether the matter as characterised is the subject of the arbitration agreement as construed; and consider whether the said matter is arbitrable. I have already referred to the observations that have been made as to the construction of arbitration clauses generally (see Rinehart v Welker per Bathurst CJ).
In particular, at [115], his Honour noted that the approach to be adopted in relation to the construction of arbitration clauses is no different to the construction of any other contractual provision - namely, the clause is to be construed objectively (referring to the principles stated by the High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 (at [40])).
At [117]-[119], Bathurst CJ noted that it has frequently been stated that arbitration clauses should not be construed narrowly (referring to remarks made by Gleeson CJ in Francis Travel at 165; by Allsop J, as his Honour then was, in Comandate at [164] (Finn and Finklestein JJ agreeing); and referring also to Walter Rau Neusser Oel und Fett AG v Cross Pacific Trading Ltd [2005] FCA 1102 at [41]-[42] per Allsop J, as his Honour then was; Global Partners Fund Ltd v Babcock and Brown Ltd (In liq) (2010) 79 ACSR 383; [2010] NSWCA 196 at [60]-[65] per Spigelman CJ (Giles and Tobias JJA agreeing); Lipman Pty Ltd v Emergency Services Superannuation Board [2011] NSWCA 163 at [6]-[8]) (and see also at [120]).
[13]
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: 05 April 2022
l und Fett AG v Cross Pacific Trading Ltd [2005] FCA 1102
Category: Procedural rulings
Parties: Berna Karadag (First Plaintiff)
Haluk Karadag (Second Plaintiff)
Samkara Holdings Pty Ltd (First Defendant)
Steven Samuel Murabito (Second Defendant)
Lupco Stojcevski (Third Defendant)
Peter Karbone (Fourth Defendant)
Bosilka Stojcevska (Fifth Defendant)
Artos Espresso Pty Ltd (Sixth Defendant)
Registrar General for New South Wales (Seventh Defendant)
Representation: Counsel:
M Ashhurst SC with A Gandar (Plaintiffs)
DA Smallbone (First to Third Defendants)
J Biady (Solicitor) (Fifth Defendant)
M Coffey (Solicitor) (Sixth Defendant)
Clause 19 (and the clauses which follow) then made provision for what was to occur in the event that the Five Dock property was to be sold pursuant to cl 18 of the Deed.
Pausing here, it can thus be seen that the Five Dock property was in a practical sense being treated as the source of funds for the performance of the obligation to make payment of the purchase price (as determined in accordance with the Deed) for the plaintiffs' shares in Samkara Holdings and their interests in the Karasam Trust. In the event that Mr Murabito and Mr Stojcevski failed to make the requisite payment (and thus it was suggested in submissions that it was seemingly for the performance of those obligations) the Five Dock property was to be sold. Nevertheless, strictly speaking, the Five Dock property was not encumbered in favour of the plaintiffs to secure payment of the purchase price; and until the valuer's determination, the time for payment of the purchase price did not start to run.
The Deed went on to make provision, following completion of the sale of land under the provisions of the Deed, for the parties to do all things necessary immediately to put Samkara Holdings into voluntary liquidation (see cll 26 and 27).
The Deed further provided for the dismissal of the then extant Court proceedings with no order as to costs and the steps to be taken in relation thereto (see cll 28-31). Clause 32 made provision for the withdrawal by the plaintiffs of their caveat over the Five Dock property (simultaneously with the earlier of the payment of the Purchase Price or at settlement of the sale of the land owned by the company pursuant to the terms of the Deed). Clause 33 made provision for the withdrawal of the caveat, on certain conditions, if such removal was required to facilitate a refinance of the mortgage which discharged the plaintiffs' personal guarantees to ING Bank.
The plaintiffs say that this regime effectively permitted the plaintiffs to maintain a caveat over the Five Dock property, while the mechanism for determination of the purchase price took place, and with provision for the removal of the caveat in the event of a refinance, subject to the position that if the plaintiffs failed or refused to remove the caveat for the purposes of refinancing they were at risk of interest accruing in respect of the refinance if the company could not demonstrate that the mortgage to Mr Karbone had been advanced for the benefit of the company (see the transcript of the proceedings on 15 September 2021 at T 6.6-15).
Clauses 34 and 35 contained releases; and cl 36 provided for the payment by the defendants to the plaintiffs within a specified time of a sum of money in full and final satisfaction of their costs of the proceedings.
Relevantly, cll 37 and 38 provided as follows:
37. Any dispute, controversy or claim arising out of, relating to or in connection with this contract, including any question regarding its existence, validity or termination, shall be resolved by mediation in accordance with the ACICA Mediation Rules. The mediation shall take place in Sydney, Australia and be administered by the Australian Centre for International Commercial Arbitration (ACICA).
38. If the dispute has not been settled pursuant to the said Rules within 60 days following the written invitation to mediate or within such other period as the parties may agree in writing, the dispute shall be resolved by arbitration in accordance with the ACICA Expedited Arbitration Rules. The seat of arbitration shall be Sydney, Australia. The language of the arbitration shall be English.
The above clauses follow the ACICA pro forma clauses for Mediation followed by Arbitration save that the word "Expedited" was inserted (to select ACICA's Expedited Arbitration Rules 2016) and a final sentence nominating the number of arbitrators was deleted (as, pursuant to r 9.1 of the ACICA Expedited Arbitration Rules, there shall be one arbitrator in expedited arbitrations).
The plaintiffs' submission on the question of balance of convenience was that: first, the proceeds of sale represented the only available asset from the company; and second, that if the company were to go into liquidation, that might well mean that the ability to chase any further assets would depend upon whether or not the liquidator could be financed.
I extended the freezing orders to 20 September 2021 and made orders in relation to compliance with the notice to produce (in respect of which there had been issues raised as to access to documents sought by the notice). The matter was then stood over to 20 September 2021 before me, when I further extended the freezing orders, listed any application for a further extension before the duty judge on 11 October 2021 and listed the motion for a stay of the proceedings for hearing before me on 15 October 2021.
On 11 October 2021, the matter came before Rein J who gave leave for the filing of a further amended summons (joining the sixth defendant, Artos Espresso, and making a freezing order against each of the fourth to sixth defendants).
On 14 October 2021, the matter again came before Rein J. His Honour (among other things) extended the various freezing orders until 22 October 2021 and ordered that the matter proceed by way of pleadings (with a statement of claim to be served on or before 28 October 2021).
The plaintiffs allege that the second and third defendants engaged (by the conduct pleaded from [34] onwards) in a dishonest and fraudulent design to cause the transfer of the Five Dock property to Artos Espresso and the remittance of the net proceeds of sale first to Mr Karbone and Ms Stojcevska, and subsequently to Artos Espresso, without the plaintiffs' knowledge and to their detriment (at [79]); that the second and third defendants breached fiduciary duties (including the conflict rule and profit rule) owed by them as directors to Samkara Holdings in relation to the grant of the Stojcevska and Karbone equitable mortgages (at [80]-[82]) and are liable to pay equitable compensation and or alternatively the proceeds of sale of the Five Dock Property to Samkara Holdings (at [83]); that each of the remaining defendants (the fourth to sixth defendants) knowingly assisted in the dishonest and fraudulent design, and is liable, under the second limb of Barnes v Addy (1874) LR 9 Ch App 244) to pay equitable compensation for the breaches of fiduciary duty and further, or in the alternative, to pay the proceeds of sale of the property to Samkara Holdings (at [84]-[87]); and, further or in the alternative, that Artos Espresso was in knowing receipt of assets in breach of fiduciary duty and is liable, under the first limb of Barnes v Addy to pay equitable compensation for the breaches of fiduciary duty and further, or in the alternative, to pay the proceeds of sale of the property to Samkara Holdings (at [88]-[89]).
At [90]-[93] there are the allegations that the transfer was intended to defeat creditors (namely, the first and second plaintiffs as current or future creditors of Samkara Holdings) and hence voidable pursuant to s 37A of the Conveyancing Act at the instance of the plaintiffs; and at [94]-[96] it is alleged that the Artos - Karbone Equitable Mortgage and the Artos - Stojcevska Equitable Mortgage are voidable at the instance of Samkara Holdings pursuant to s 37A (on the basis that, in all the circumstances, those mortgages - and other events prior thereto - were entered into with intent to delay, hinder or defraud Samkara Holdings as a current or future creditor of Mr Karbone and Ms Stojcevska).
At [97], the plaintiffs plead that leave should be granted to them to bring these proceedings against the second to third defendants on behalf of and in the name of Samkara Holdings.
Therefore, the first to third defendants say that the plaintiffs' submission (seeking to confine the scope of the dispute clauses to disputes concerning specific subjects forming specific elements of the mechanism prescribed in the Deed) is contrary to orthodox principles concerning the construction of such dispute clauses.
Moreover, although the phrase "under this Deed" is not contained in the present mediation and arbitration clauses, the first to third defendants say that the breadth accorded to that phrase in Rinehart v Hancock Prospecting Pty Ltd (2019) 267 CLR 514; [2019] HCA 13 (Hancock Prospecting) (particularly by the plurality at [45]-[48]) tells strongly against the plaintiffs' submission. It is said that, as was the situation in Hancock Prospecting, the present case is one where the dispute clause is set in a settlement agreement; and that the purpose of the settlement was, according to Recital G, "to settle all disputes between them arising out of the issue of the proceedings" (as to which Recital A identified the former winding up suit on just and equitable or oppression grounds and Recital D recited that the plaintiffs were in substance seeking to withdraw from their investment in the company).
The first to third defendants say that the purpose of the Deed was not merely to end the pre-existing particular dispute but to achieve a separation of the parties and a withdrawal of the plaintiffs from the company (Samkara Holdings) through an agreed procedure for valuation and pro-rata payment (to the extent that there were sufficient net assets) and with releases for all parties. It is said that the mediation and arbitration clauses were an integral part of that purpose, in providing mechanisms to resolve any dispute connected with those purposes or any of them.
So, for example, the first to third defendants point to the assertion by the plaintiffs that the sale of the Five Dock property was not in pursuance of the terms of the Deed. They say that it is unclear whether it is asserted to be a breach, or merely a step that was not regulated. The first to third defendants maintain that cl 18 has not yet been engaged. It is accepted that it might be argued that sale in advance of completion of the valuation process could be an anticipatory breach in some circumstances but that this is not necessarily so in all cases (and particularly, they say, where a sale would otherwise have been made by the bank). Nevertheless, for present purposes, the first to third defendants say that this subject is not divorced from the Deed, in circumstances where an outcome of that procedure was to be (upon cl 35 becoming effective) that the plaintiffs were to have no further interest in the company (whether as creditors, shareholders or unitholders in the Trust of which it was trustee).
The first to third defendants say that criticism made by the plaintiffs as to the conduct of the sale (comparing it with the deal in the Deed), while contentious, is properly seen as "arising out of, relating to or in connection with" the contract to bring about a settlement and separation of their affairs. It is said that the plaintiffs' evident purpose in this proceeding is to increase the value of the company so as to maximise their entitlements in that process; and that both that purpose and the claims seeking to give effect to it are related to or in connection with or arising out of the Deed.
The first to third defendants point out that the Deed is invoked in the formulation of the claim in the plaintiffs' various iterations of the summons; that the mediation and arbitration clauses do not limit the disputes to which they apply to those which depend on the contract; and they say that it has not been established that the contract (i.e., the Deed) is not a matter arising by way of defence to the matter, even if were not involved in the primary elements of the plaintiffs' case (noting that the "matter" upon which s 8 operates is to be ascertained by reference to the substance of the underlying controversy between the parties, which requires attention both to claims and defences).
It is noted that the final relief sought in the further amended summons begins, at prayer 5, with an application for leave to proceed in the name of Samkara Holdings (itself a party to the arbitration agreement) in respect of the entirety of the relief sought in the proceeding; and that prayer 8 seeks specific performance of the Deed. The first to third defendants say that the object of the proceeding is thus for the plaintiffs to obtain performance of the agreement for sale of their shares in Samkara Holdings and of their units in the Karasam Trust in accordance with the Deed and to effect a complete release of the company from all of their claims.
It is noted that, when the matter was before the Court on 15 September 2021, the plaintiffs submitted orally that the various claims they sought to make must be established before the valuation process provided for in the Deed could proceed, as decision on the plaintiffs' claims will affect the identification of the assets that are to be considered by the valuer in determining the value of their shares and units. The first to third defendants contend that submission to be wrong but say that, in any event, it amounts to a concession that the claims arise out of, relate to or are connected with the Deed (and hence the controversy on either view is within the scope of the arbitration clause).
The first to third defendants point to cl 13, which they say confers on the valuer jurisdiction to determine whether any disputed debt or expenditure of the company "is a valid debt of or expenditure by the Company incurred in relation to the proper operations of the Company and applied in good faith with a view to the benefit of the Company" and goes on to provide that any debt or expenditure in respect of which the valuer makes a contrary determination is to be added back to the assets of the company in determining the value of the shares in the company and interests in the trust. Further, it is noted that cl 2 provides that the valuation of shares and units is to be on a "net asset backing basis, i.e., fair market value of the Company's assets, less the amount of its liabilities".
The first to third defendants say that nothing in the Deed excludes a chose in action from being an asset; and that, accordingly, the various choses in action that it is asserted Samkara Holdings has against the fourth, fifth and sixth defendants (if they be valid choses in action) are ones that the valuer can evaluate, and upon which the plaintiffs would be entitled to make submissions under cl 11(b). It is said that any contest in respect of such submissions would be a dispute "arising out of" the contract (see cl 37) (let alone one "relating to or in connection with" the contract).
The first to third defendants further say that if the present proceeding were to continue, the jurisdiction of the valuer would need to be resolved by the Court because it is a defence to the claim for specific performance that the plaintiffs are unwilling to perform and also a defence to their winding up claim that they have agreed to an alternative procedure for a buyout (referring to s 467(4) of the Corporations Act); and that these are all matters upon which the Court should not embark because that would be contrary to the arbitration clause.
It is said that, even if the valuer did not have jurisdiction or was unable to determine the matters arising under the various claims the plaintiffs wish to make as to the assets of the company, the issues about what those assets are and what they are worth would be a dispute that needed to be resolved so that the Deed could be performed and have effect; and that this dispute would remain a dispute at least "in relation to or in connection" with the contract, if not "arising out of" it (and hence within the scope of the arbitration clause).
The first to third defendants note that the Deed provides an acceptance that the plaintiffs are unsecured creditors of the company for the sum of $325,563.45 (cl 14(b)) but that this is to form part of the payment to be made by the second and third defendants (cl 15(a)) unless it abates under cl 17, in which case the plaintiffs will not be entitled to any more than the amount remaining after abatement, and the company will have the benefit of a release (cl 35). The first to third defendants say that the condition under cl 15 for the plaintiffs' guarantees to the ING Bank to be discharged or released has been fulfilled at the latest because of the discharge of the company's liability to ING Bank on completion of the sale of the Five Dock property in September 2021. It is said that the Purchase Price ascertained under cl 14 and payable under cl 15(b) will be nil if the valuer determines that the liabilities exceed the assets; and that that would be the case before there could be any possibility of abatement of the $325,563.45 debt under cl 17.
The first to third defendants maintain that the scheme of the Deed was a buyout at fair value and that the plaintiffs were never to get more than what is reflected in a net asset backed valuation. It is said that, unless the plaintiffs can show that the property was worth more than the amount for which it was sold, and/or that it was acquired, improved, maintained and held without the money advanced by the fourth and fifth defendants, there is no prospect that they will be entitled to a payment.
Insofar as the plaintiffs contend that the land was worth substantially more than the amount for which it was sold, the first to third defendants foreshadow that they will, by way of defence, deny the undervalue and will contend that the sale price was a fair market price and that, if the property had been sold by ING Bank as mortgagee in possession, it may well have been sold for less than the amount for which it was in fact sold.
Insofar as the plaintiffs contend that the amount advanced by Mr Karbone was not for the purposes of Samkara Holdings, the first to third defendants adamantly deny this. As to the claim against the fifth defendant, the first to third defendants similarly foreshadow a denial of any claim disputing her original advance or any suggestion that it was in breach of fiduciary duty or otherwise. As to the position of the sixth defendant, the first to third defendants say that no basis has been identified on which the sale to the sixth defendant is challenged.
The first to third defendants say that the proposed derivative defendants are not necessary parties to an application for leave under s 237 (although they may oppose a grant of leave if the applicant has joined them in and acted in a way to give them a reasonable expectation of being heard, if they wish to be heard) and that the proper defendant or respondent to such an application is the company (Samkara Holdings) (though they accept that in some circumstances those who are interested in it, such as directors or shareholders, may also be proper defendants).
The first to third defendants thus say that, while the necessary respondent to the s 237 leave application is the company (and that the second and third defendants may also be proper respondents as they have a direct interest in the application for specific performance of the deed of settlement and release and in the oppression and winding up claims), the fourth to sixth defendants have no proper role in the proceeding except as respondents to interlocutory applications, and persons who might be entitled to be heard on the application for s 237 leave if they wish to participate in that application.
Insofar as the plaintiffs have suggested in the course of argument that they have a direct cause of action against the sixth defendant (Artos Espresso) because that is the nature of their claim under s 37A of the Conveyancing Act (see prayers 6 and 7), the first to third defendants say that this would imply that Samkara Holdings sold and transferred the subject property to the sixth defendant in order to defeat the claims of the plaintiffs as creditors for $325,563.45 (as to which it is said they have had no expectation of payment by the company since they entered into the Deed, and have granted the conditional release in cl 35, albeit that its effect was postponed to completion of the agreed process in respect of which they are seeking specific performance). It is submitted that this is an inadequate basis for a charge of fraud against Samkara Holdings.
In any event, even assuming this to be a claim for which the plaintiffs would not require leave under s 237 of the Corporations Act, the first to third defendants say that it is still a claim to which Samkara Holdings is a necessary party, and which is connected with the Deed. The first to third defendants say that the effect of the Deed is that the plaintiffs do not have standing to bring action under s 37A because they are not a "person thereby prejudiced"; that, rather, their remedies are under the Deed (and it is said that it is open to the plaintiffs to contend in that process that the company's assets ought to be evaluated at their true value and not on the basis of a transaction that they contend to be fraudulent, or, if that be incorrect, to assert their claims in an arbitration against the second and third defendants).
The first to third defendants argue that, on one view, the plaintiffs' unwillingness to direct the nominated valuer to proceed, or to withdraw their direction to him to stop, is a Mackay v Dick [1881] 6 AC 251 waiver of the valuation and payment condition for the cl 35 release to take effect (in which case the plaintiffs are not creditors of Samkara Holdings at all) but that it is unnecessary to resolve this question on the present application.
The first to third defendants thus say that the issues concerning the s 37A claims arise out of, or are in relation to or are connected with, the Deed and are all issues for an arbitrator, if they arise at all.
For those reasons, it is submitted by the first to third defendants that there is no part of the proceeding that is outside the scope of the arbitration clauses.
The first to third defendants complain that the plaintiffs have failed to initiate an arbitration (or to accept that they should do so); and have not withdrawn their objection to the valuer under the expert determination procedure provided in the Deed nor confirmed his appointment; nor have they exercised the agreed procedure to inspect the accounting records of the company or produced their own records under that procedure.
It is noted that the power to invoke compulsory process against third parties in aid of an arbitration arises from ss 27 and 27A of the Commercial Arbitration Act, which require the permission of the arbitral tribunal (and which are not available to the Court in the absence of the commencement of an arbitration and permission of the arbitrator).
The first to third defendants submit that the evident purpose of s 8 is to require parties to adhere to their arbitration agreements without discretionary exceptions (pointing to the strong disposition towards enforcement of exclusive jurisdiction clauses described in Australian Health v Hive Marketing at [76]-[78]). It is noted that the only exceptions are those stated in s 8(1) itself; and that there is a more or less uniform and consistent regime for commercial arbitration, both domestically and for international and foreign arbitration (referring to the International Arbitration Act 1974 (Cth)) structured to conform with the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 3 (entered into force 7 June 1959) (New York Convention 1958) and the UNCITRAL Model Law on International Commercial Arbitration.
Thus, the first to third defendants say that the proceedings should be stayed and that the plaintiffs should pay the defendants' costs of the motion and of the proceedings, including all costs that Samkara Holdings may hereafter be ordered to pay to any other defendant.
The plaintiffs say that the Deed sought to achieve the withdrawal of the plaintiffs' investment in Samkara Holdings by providing for the purchase of the plaintiffs' shares by the second and third defendants at a price to be determined in accordance with the terms of the Deed (cl 2); that the valuation process involved access to financial information and the resolution by an appointed valuer of any disputed debts or expenditure of Samkara Holdings (cll 10, 13); and that the Deed also dealt with the disputed equitable mortgage to Mr Karbone by providing for the plaintiffs to agree to its refinance provided that Samkara Holdings could demonstrate to the appointed valuer that the mortgage was advanced and that the loan advance was used for the sole benefit of Samkara Holdings (cl 33). It is noted that, if the share sale did not complete, the Five Dock property was to be sold and Samkara Holdings put into voluntary liquidation or, failing that, for the parties to join in applying for a Court ordered winding up (cll 18, 26).
The plaintiffs say that the Deed sought to achieve the settlement of disputes between the parties arising out of the issue of the earlier proceedings by releases and by requiring the parties to execute and submit consent orders dismissing those proceedings and providing for a payment on account of the plaintiffs' costs of those proceedings (see cll 28-31, 36). It is noted that the first to third defendants granted releases to the plaintiffs and, upon completion of the share transfer or upon the liquidation of the company, the plaintiffs granted releases to the defendants (cll 28-31, 34-35). The releases were expressed to be "by reason of or arising out of the subject matter of the disputes in the proceedings" and it is said that, under established principles, they would be construed as limited to what was specifically in contemplation of the parties at the time when the release was given (citing Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112; [1954] HCA 23 at 123-132 per Dixon CJ, Fullagar, Kitto and Taylor JJ).
Second, the plaintiffs reiterate the submission made in their 15 September submissions to the effect that the relief sought in the first to third defendants' notice of motion is premature as the plaintiffs at this stage have only applied for urgent interlocutory relief, including against persons who are not parties to the Deed. It remains the plaintiffs' position that there is nothing incompatible with the arbitration agreement for the plaintiffs to seek, as they have done, interim measures to maintain or restore the status quo.
The plaintiffs say that, since their 15 September submissions, they have sought (by way of notices to produce and subpoenas) to obtain documents disclosing the true nature of the transaction(s) that took place on the sale of the Five Dock property, including for the purpose of determining whether to apply for the current interlocutory relief to be extended to any additional party; and they say that those processes have not concluded.
In response to the submissions filed by the first to third defendants on 13 October 2021, the plaintiffs say the following.
First, the plaintiffs say that the first to third defendants (at [7]-[23]) fail to give proper consideration to the actual terms of the arbitration clause in question, noting that in Paper Products v Tomlinsons (Rochdale) Ltd (1993) 43 FCR 439; [1993] FCA 494, French J, sitting in the Federal Court as his Honour then was, made clear (at 444) that the scope of disputes covered by an arbitration clause depends on the language of the clause and referring to what was said by Bathurst CJ in Rinehart v Welker (2018) 95 NSWLR 221; [2012] NSWCA 95 at [120] to the effect that the words of an arbitration clause should, to the extent possible, and consistently with the ordinary meaning of the words, be liberally construed.
The plaintiffs suggest that the submissions of the first to third defendants amount to the proposition that any dispute between the parties, howsoever arising, that involves a claim "to increase the value of the company" is subject to the terms of the arbitration clause (see at [21]). (Pausing here, I do not read the submissions as extending this far.) Nevertheless, the plaintiffs suggest that what the first to third defendants are in effect submitting is that the words "arising out of, relating to or in connection with this contract" should be understood as if they instead read "arising out of, relating to or in connection with any of the entities or assets referred to in this contract".
The plaintiffs submit that the clause, as drafted, means any dispute that either arises from the operation of the terms of the contract or is concerned with the creation, implementation, or application of any of the terms of the contract; but that what is critical is that the dispute must have a connection with the terms of the contract. It is submitted that a dispute that has no actual connection with the terms of the contract (even if it involves the same parties or assets referred to in the contract) is not a dispute "arising out of, relating to or in connection with this contract".
The plaintiffs contend that their analysis is consistent with the purpose of the Deed, namely, to resolve the then current disputes between the parties and to achieve a separation of the parties. It is said that the purpose of the Deed was not to cater for all possible future disputes between the parties that were beyond the express (or implied) terms of the Deed.
The plaintiffs contend that the following matters emerge from their enquiries to date: that the Five Dock property was due to be sold by ING Bank (as mortgagee in possession) by way of public auction on 31 August 2021 (an advertisement to this effect was in evidence when the matter first came before me); that the second and/or the third defendants caused the ING Bank sale not to proceed by making false statements to the ING Bank to the effect that Samkara Holdings had arranged refinancing of the ING Bank debt and that the second and third defendants did not know the contact details of the other guarantors to the ING loan and therefore could not assist ING Bank in having the discharge authority signed by the plaintiffs; that the second and third defendants caused the property to be sold to the sixth defendant (a company known to the second defendant as it had purchased a property from the second defendant and had entered into a lease of the property); that sales proceeds in the amount of $475,000 were paid to the fourth defendant and sales proceeds in the amount of $552,720.45 were paid to the fifth defendant; that the fourth and fifth defendants have, in answer to Notices to Produce, failed to produce any evidence of any loans made by either of them to Samkara Holdings; and that, immediately upon the settlement of the sale funds the fourth and fifth defendants loaned those moneys to the purchaser of the property (the sixth defendant).
The plaintiffs believe from this evidence that the second and third defendants have used their fiduciary position as directors of Samkara Holdings to gain a benefit for the fourth and fifth defendants (and possibly the sixth defendant).
The plaintiffs emphasise that none of these events had occurred at the time the Deed was executed. They say that the Deed has no provision for dealing with this form of breach of fiduciary duty; and they submit that an appropriate way of determining whether this dispute (which arose after the Deed of Settlement was executed), is subject to clause 37 of that Deed is to postulate whether the plaintiffs' cause of action in respect of this matter depends, by way of material fact, on any of the terms of the Deed or whether the first to third defendants could plead, by way of defence to this claim, any of the terms of the Deed.
The plaintiffs say that identification of the "matter" which is the subject of the arbitration agreement is critical because it is the overlap between that "matter" and the controversy in the action that enlivens the obligation in s 8(1) of the Commercial Arbitration Act (citing Hancock Prospecting Pty Ltd v DFD Rhodes Pty Ltd (2020) 55 WAR 435; [2020] WASCA 77 (Hancock v DFD Rhodes) at [119] per Quinlan CJ, Beech and Vaughan JJA agreeing on this issue at [475]). It is noted that the matter to be determined in a proceeding is to be ascertained by reference to the subject matter of the dispute in the proceeding in the substantive (although not necessarily the ultimate) question for determination; and that, in addition to identifying the "matter" which is the subject of the arbitration agreement, the controversy falling for determination in the action must be identified.
The plaintiffs point to the composite nature of the phrase in s 8, namely that it refers not only to the "subject matter" of the controversy the subject of the action but also to the parties who have the dispute or difference about that "subject matter" (citing Hancock v DFD Rhodes at [135]). They note that the "matter" is, relevantly, the "differences between the parties, the controversy between the parties, which, under the agreement, the parties have agreed to submit to arbitration" (citing Hancock v DFD Rhodes at [141]-[142]).
It is noted that in Hancock v DFD Rhodes, the Court adopted the approach of identifying the relevant "matter" as being the differences between the parties to the agreement, as had been applied by the Full Court of the Federal Court in the context of s 8 of the Commercial Arbitration Act in Hancock Prospecting Pty Ltd v Rinehart (2017) 257 FCR 442; [2017] FCAFC 170 (HPPL v Rinehart FFC). At [151], Quinlan CJ observed that in HPPL v Rinehart FFC, even though the controversy encompassing some parties to the proceedings may have been the same subject matter as the claims against the parties to the arbitration agreement, those controversies did not form part of "the matter the subject of the arbitration agreement". Thus, the plaintiffs say that in HPPL v Rinehart FFC, although the dispute about whether certain claims against non-parties were within the scope of the arbitration agreement was itself liable to be stayed, the actual claims themselves against the third parties were not within the scope of the arbitration agreement (referring to [331] and to Hancock v DFD Rhodes at [152]-[154]).
It is noted that the scope of the matter is to be ascertained from the pleadings and from the underlying subject matter upon which the pleadings, including the defence, are based (see Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332; [1990] HCA 8 (Tanning Research) at 350-351 per Deane and Gaudron JJ; Recyclers of Australia Pty Ltd v Hettinga Equipment Inc (2000) 100 FCR 420; [2000] FCA 547 (Recyclers) at [18] per Merkel J; Hancock v DFD Rhodes at [128]). In this context, the plaintiffs submitted that the current application should be deferred until after the plaintiffs had filed a statement of claim (i.e., once they had had an opportunity properly to articulate their case), following the conclusion of the interlocutory relief and the restoration of the status quo. It is submitted that the difficulty faced in seeking to ascertain the scope of the "matter" now, based only on the further amended summons, is an indication of the premature nature of the application.
As to the final relief that is sought in the further amended summons, the plaintiffs say that there is some common ground (see below) but that the "matter" and the controversies in the proceedings in this Court are not coextensive (and they say that it is only the "matter" between the parties to the arbitration agreement and within the scope of the arbitration agreement upon which s 8 of the Commercial Arbitration Act operates). The plaintiffs say that there are a number of "matters" the subject of the present proceeding and that, although there is an "element of interconnectedness" insofar as they relate to the disposition of the Five Dock property, there is not a single inseverable matter here to be determined.
The plaintiffs say that the claims for specific performance of the Deed in prayer 8 and for damages for breach of the Deed in prayer 12 are direct claims by the plaintiffs against the first to third defendants, each of whom is a party to the arbitration agreement. It is accepted by the plaintiffs that these controversies are within the matter contemplated by the arbitration agreement because the disputes arise out of or are in connection with the Deed.
Second, the plaintiffs point to the claims for oppression in prayers 9-11 which are direct claims by the plaintiffs against the second and third defendants. It is accepted that the proposed defences bring these controversies into the scope of the arbitration agreement because the second and third defendants intend to argue that the valuation of the shares for the purposes of any compulsory acquisition is provided for by the Deed and that the winding up of the company will be opposed on the basis that there is an alternative procedure for a buyout under the Deed (though the plaintiffs say that this argument is inconsistent with the second and third defendants' position put in written and oral submissions on 15 September 2021 to the effect that they themselves intended to put Samkara Holdings into liquidation).
The plaintiffs do not accept (cf the first to third defendants' submissions at [44]), that the fact alone of the application for leave to bring a derivative action on behalf of Samkara Holdings brings any of the claims within the arbitration agreement, let alone the whole of the proceeding. Insofar as it is suggested that any claim the plaintiffs seek to bring through Samkara Holdings would be caught by the arbitration agreement, the plaintiffs say that (by that reasoning), a claim in negligence against the company's auditors would be said to fall within the scope of the arbitration agreement even though this plainly would not be correct as it would be entirely outside the matter the subject of the arbitration agreement.
The plaintiffs say that the only potential relevance of the plaintiffs seeking to bring actions through Samkara Holdings by means of a derivative suit would be to bring the plaintiffs within the extended definition of a "party" to an arbitration agreement, which is entirely unnecessary because the plaintiffs are already parties to the only relevant arbitration agreement. Further, and in any event, it is said that only some of the claims in the proceeding are sought to be conducted on behalf of Samkara Holdings (namely, those represented by prayers 6 and 7 and 11G-11I).
The plaintiffs say that, contrary to [62]-[69] of the first to third defendants' submissions, there are three s 37A claims: first, a claim in prayers 11A-11F against the first and sixth defendants to set aside the transfer of the Five Dock property to the sixth defendant on the basis that it was made with intent to delay, hinder or otherwise defraud the plaintiffs as current or future creditors of Samkara Holdings or because the transaction was executed to place an impediment in their way in pursuit of a civil remedy; second, a derivative claim in prayers 11G-11I by Samkara Holdings against the fourth and sixth defendants to set aside the unregistered mortgage of the property given by the sixth defendant to the fourth defendant on 6 September 2021 in relation to the advance to the sixth defendant of funds that the fourth defendant received out of the sale of the Five Dock property; and, third, a derivative claim also in prayers 11G-11I by Samkara Holdings against the fifth and sixth defendants similar to the second claim but in relation to the unregistered mortgage given to the fifth defendant on 6 September 2021 in relation to the advance to the sixth defendant of the funds that the fifth defendant received out of the sale.
The plaintiffs say that the breach of fiduciary duty claims sought to be brought on behalf of Samkara Holdings against the second and third defendants in pursuit of prayers 6 and 7 do not depend, by way of material fact, on any term or obligation arising under the Deed and so this action and the controversies that it raises do not fall within the matter the subject of the arbitration agreement. The plaintiffs say that (contrary to [20]-[21] of the first to third defendants' submissions and in contrast to the actions for specific performance and damages for breach of the Deed), the controversies in respect of these claims are whether or not the transfer of the Property to a business associate of the second defendant and the payment of the proceeds of sale to the fourth defendant and fifth defendant were in breach of the first and second defendants' fiduciary obligations not to obtain any unauthorised benefit or be in a position of conflict.
As for any foreshadowed defence, it is noted that the second and third defendants admit (in [20]) that cl 18 of the Deed (which provides for the land owned by the Company to be sold by the Company) has not been engaged and so the plaintiffs say that there is no sustainable argument that the sale of the Five Dock Property was conducted pursuant to the terms of the Deed. Similarly, they say that there can be no sustainable argument that what took place was the refinance of the mortgages to ING Bank and the fourth defendant referred to in cl 33 of the Deed. The plaintiffs maintain that in no way does the conduct of the second and third defendants alleged in the breach of fiduciary duty actions resemble anything embodied, envisaged or comprehended by the Deed.
The plaintiffs argue that the accessorial claims in prayers 6 and 7 against the fourth, fifth and sixth defendants also fall outside the matter the subject of the arbitration agreement (for essentially the same reasons) and for the additional reason that these are claims against true strangers to the Deed who are non-parties to the arbitration agreement. It is said that there can be no credible explanation for the transfer of the Five Dock property to the sixth defendant or the payment of the proceeds of the fourth or fifth defendants that raises any connection with any term of the Deed (and that no such explanation has been ventured by the first to third defendants). It is said that the controversies surrounding the creation of the unregistered mortgages and the advance of the proceeds of sale from the fourth and fifth defendants to the sixth defendant are even further removed because all of the relevant conduct is by strangers to the arbitration agreement.
It is said that each of the s 37A claims falls outside the matter the subject of the arbitration agreement for essentially the same reasons as the breach of fiduciary duty and accessorial liability claims. The plaintiffs say that (contrary to what is said in the first to third defendants' submissions at [63]-[66]), if the first to third defendants seek to raise a controversy about whether or not the plaintiffs have standing to bring the s 37A claims against the fourth to sixth defendants, that controversy itself may fall within the arbitration agreement but the actual claims against the fourth to sixth defendants, being true strangers to the arbitration agreement, are not liable to be stayed on that basis (citing HPPL v Rinehart FFC at [331] and Hancock v DFD Rhodes at [152]-[154]). Further, it is said that the s 37A action in relation to the transfer of the Five Dock property to the sixth defendant is not arbitrable because there is a sufficient element of legitimate public interest in the subject matter of the dispute to make its private resolution outside of the national court system inappropriate, it would operate to affect the rights of third parties such as the registered mortgagee and the outcome would affect the public register maintained by the Registrar-General (the seventh defendant).
As noted above, the plaintiffs' position is that the application should be stood over until after the status quo has been restored by appropriate interlocutory orders preserving the proceeds of sale of the Five Dock Property and the parties have had an opportunity to articulate their case in a pleading.
In relation to the status quo, the plaintiffs say that the facts as currently apprehended are that the second and third defendants misled the mortgagee in possession of the Five Dock property (ING Bank), by falsely representing that they had arranged a refinance and that the consent of the plaintiffs was not required. It is said that the motivation appears to have been to dissuade ING from selling the Five Dock property at public auction and to conceal from, or delay or hinder the plaintiffs from learning of, the proposed transfer of the Five Dock property to the sixth defendant until the transfer had been effected and Samkara Holdings had lost title to the Five Dock property. The plaintiffs say that a substantial portion of the purchase price of the Five Dock property was paid to the fourth and fifth defendants ostensibly as "secured creditors" by reason of unregistered mortgages notwithstanding that neither party has produced any document evidencing any advance of funds at any time to Samkara Holdings. Again, it is said that there is evidence that the fourth defendant advanced funds to other entities associated with the second and third defendants but not to Samkara Holdings and there is no evidence at all of any advance of funds from the fifth defendant.
The plaintiffs say that the funds paid out of the proceeds of sale to the fourth and fifth defendants were immediately advanced to the purchaser, the sixth defendant, who granted the fourth and fifth defendants unregistered mortgages over the Five Dock property. It is said that the loan agreements, if there are any, have not been produced by the sixth defendant. The plaintiffs complain that these "loans", occurring simultaneously with the conveyance of the Five Dock property, have had the effect that the sixth defendant, who was represented on the transaction by the solicitor also acting for Samkara Holdings, received not only the Five Dock property itself but also took all of the equity that was in the Five Dock property in cash. It is said that, at present, although there are freezing orders in place against the fourth to sixth defendants and injunctions restraining further dealings with the Five Dock property and from any such dealing being recorded on the register maintained by the Registrar-General, the plaintiffs do not know if the sixth defendant is still in possession of the proceeds of sale advanced to it by the fourth and fifth defendants and do not know if there is any equity left in the Five Dock property after the registered mortgage granted by the sixth defendant to a third party. Complaint is made that the sixth defendant has not complied with a notice to produce calling for documents recording or evidencing any disposition of the funds by the sixth defendant to any other party.
The plaintiffs say that (contrary to the first to third defendants' submission at [34]), it cannot be concluded that the plaintiffs are maintaining the proceeding to use compulsory Court processes for purposes extraneous to any proper exercise of the Court's jurisdiction. Rather, it is said that the plaintiffs are doing nothing more than seeking the aid of the Court to restore the status quo by restraining any further dealing with the Five Dock property and by securing and preserving the proceeds of sale of the Five Dock property. The plaintiffs submit that, in such an application, there is nothing unusual or untoward in utilising the compulsory processes of the Court to obtain information about the nature, extent and whereabouts of the assets in question.
Insofar as complaint is made as to use of subpoenas and notices to produce in the course of obtaining interlocutory relief as being a fishing expedition and an abuse of process, it is noted that those complaints were made and that leave was nevertheless granted to issue the subpoenas and orders were made for production under the notices; and that no motion was filed by the first to third defendants (or any of the recipients of the subpoenas and notices) seeking to set those processes aside. It is said that the results of those notices to produce and subpoena have allowed the plaintiffs to advance their case to its present position.
Insofar as it is said at [31]-[33] of the first to third defendants' submissions, that the present proceedings do not involve an application for interim measures under s 17J of the Commercial Arbitration Act and that the relevant power to invoke compulsory processes against third parties in aid of an arbitration arises from ss 27 and 27A, the plaintiffs say that this misconstrues the nature and purpose of the interlocutory relief obtained by the plaintiffs and is contrary to the express terms of the statute (noting that injunctions and freezing orders are plainly interim measures within the meaning of the Commercial Arbitration Act (as defined in ss 2 and 17)).
The plaintiffs say that s 9 makes plain that it is not necessary that the arbitration be presently constituted for a party to seek interim measures under s 17J because it expressly provides that it is not incompatible with an arbitration agreement for a party to request from a court an interim measure of protection and for the court to grant the measure before the commencement of arbitral proceedings. It is said that the use of compulsory processes to obtain information relevant to the assets that are the subject of the freezing orders and restraints is not the exercise of a power for the taking of evidence under ss 27 and 27A but is akin to the common ancillary order for an affidavit as to the assets of the defendant. Reference is made by way of example in this context to ENRC Marketing AG v OJSC Magnitogorsk Metallurgical Kombinat (2011) 285 ALR 444; [2011] FCA 1371, where Rares J gave leave on an ex parte application to issue subpoenas seeking documents evidencing the assets the subject of a freezing order made as an interim measure in connection with an international arbitration.
Moreover, the plaintiffs say that (contrary to what is said in the first to third defendants' submissions [35]), there is nothing incompatible with the arbitration agreement for the plaintiffs to seek these interim measures and there is nothing incompatible with the arbitration agreement for the Court to grant these measures; so much is said in s 9 of the Commercial Arbitration Act. It is said that to defer the application until after the status quo has been restored would be consistent with ss 9 and 17J of the Commercial Arbitration Act and would ensure the efficacy of the court ordered interim measures contemplated by the Act. Against this, it is said that the stay of the proceedings before the restoration of the status quo urged by first to third defendants deprives of its utility the availability under the Commercial Arbitration Act to seek interim measures ordered by the court before an arbitration.
Further, it is submitted that, to decide the stay application after the plaintiffs have filed a pleading, would not be inconsistent or in disobedience of the mandatory nature of s 8. It is said to be commonly the case that pleadings are referred to in the process of ascertaining whether there is any overlap between the controversies in the action and the matter the subject of the arbitration agreement.
In oral submissions, the plaintiffs reiterated their submission that the disputes do not fall within the arbitration clause. It was said that the evidence now available demonstrates: that the machinery under the Deed was never invoked; that the property was to be sold by the mortgagee in possession by way of public auction; that the second and third defendants made false statements to the mortgagee in possession as to a claim for refinance and a claim that they did not have contact details for the plaintiffs as guarantors so as to seek their consent, as a result of which the sale by public auction did not occur; that the second defendant caused the property to be sold to a business associate; that approximately $1 million of the proceeds of sale went to the fourth and fifth defendants; that, in answer to a notice to produce neither the fourth or fifth defendants could adduce evidence of ever having advanced moneys to Samkara Holdings; and that, immediately upon the sale of the property to Artos Espresso, the $1 million which had been paid to the fourth and fifth defendants by it was loaned back to it by the fourth and fifth defendants.
The plaintiffs' submissions emphasise that the Deed was to resolve the existing disputes between the parties, as they had been enunciated in the pleadings, and to separate the parties; but did not release the parties about what they might do in the future (outside of the terms of complying with the machinery of the Deed). It is submitted that the Deed did not objectively intend to deal with the second and third defendants acting (not in accordance with the Deed at all, but on an entirely separate basis) to cause the sale of the property by the mortgagee in possession not to proceed (and instead selling it to a business acquaintance and causing $1 million of the funds to be distributed to the fourth and fifth defendants).
The plaintiffs say that, when considering whether or not the claim arises out of or connects to the terms of the contract, if those contractual terms are not engaged (either as a necessary element of the cause of action or as a defence to the cause of action), then the fact that they may have a consequential effect on what could otherwise have happened under the terms of the contract does not mean that the parties objectively ever intended for that event to be covered by the clause.
A "matter" for the purposes of s 8(1) means some right or liability in dispute which is susceptible of settlement as a discrete controversy (see Tanning Research at 351); it is something more than a mere issue that falls for decision"; and it is to be understood "by reference to the arbitration agreement" (see Comandate at [235]; see also HPPL v Rinehart FFC at [157]). A matter, for the purposes of s 8(1), may or may not comprise the whole dispute in any given court proceeding.
In Recyclers v Hettinga, Merkel J said (at [18]-[19]):
18. … The scope of the matter is to be ascertained from the pleadings and from the underlying subject matter upon which the pleadings, including the defence, are based …
19. The manner in which a claim or a defence is pleaded is of importance to, but is not determinative of, the characterisation of the "matter" …
In HPPL v Rinehart FFC, it was said (at [157]) that:
157. … If the proper construction of the agreement requires a focus on individual disputes or requires a certain connection between the necessary resolution of an issue with the operation of an operative document, then close attention will be required to each individual issue or dispute to identify that connection, and so to identify the "matter". ...
Where there are a number of "matters" the subject of the relevant proceeding, what is necessary to determine is whether there is a dispute that contains a substantial issue that concerns the exercise of rights or obligations in the agreement contained in the Deed, or a dispute that concerns the existence, validity or operation of the agreement as a substantial issue, or a dispute the resolution of which is governed or controlled by the agreement (see the HPPL v Rinehart FFC at [193]). If it is concluded that the proceeding raises matters the subject of an apparently valid arbitration clause, and the other requirements of the commercial arbitration legislation are satisfied, then I am required to refer the parties to arbitration (this is not a matter of discretion).
If some, but not all, matters in a proceeding are the subject of an arbitration agreement (and are arbitrable) that does not necessarily mean that the whole of the proceedings must be stayed. The applicable principle stated in Recyclers at [20] is that "a proceeding that includes matters severable from or independent of the matter required to be referred to arbitration need not be stayed in respect of those matters". That principle was subsequently adopted by Nettle JA, as his Honour then was, in Flint Ink NZ Ltd v Huhtamaki Australia Pty Ltd (2014) 44 VR 64; [2014] VSCA 166 at [105]. In such cases the approach to be taken is essentially a case management decision.
As noted above, the plaintiffs in the present case accept that a dispute as to (say) the carrying out of the valuation required under the Deed (or an issue arising as to the operation of the contract or separation procedure; or a claim for breach of the contract) would fall within the arbitration clause; but they contend that a dispute as to steps allegedly taken to frustrate the ability to implement the machinery provisions of the contract would not be something arising out of the contract. They maintain that the claims here made neither relate to the matters the subject of the releases under the Deed, nor relate to the carrying out of any act in accordance with the machinery of the Deed; and hence are matters that cannot have been in the contemplation of the parties as being subject to the arbitration clause in the Deed.
Relevantly, while it is accepted that the acts of the first to third defendants in breaching the contract would fall within the clause, the plaintiffs say that the act of breaching fiduciary duties owed to Samkara Holdings would not be within the clause (and nor would the knowing assistance/knowing receipt claims against third parties to the Deed).
I accept that just because there is a dispute between the parties to the Deed after entry into the Deed does not mean that the dispute is caught by the arbitration clause. However, I consider that disputes as to conduct that it is submitted was engaged in to defeat the interests of the plaintiffs under the Deed (i.e., to be paid the purchase price, if not directly by the second or third defendants then out of the sale of the Five Dock property) or as current or future creditors of Samkara Holdings (those interests relating to the claims the subject of the proceedings resolved by way of the Deed and to the mechanism by which the plaintiffs were to be paid out for their shares in Samkara Holdings and interest in the underlying trust) are disputes "in connection with this contract" at the very least (if not also disputes arising in relation to the Deed).
At the time that the stay application was heard, there was no pleading. At that stage the plaintiffs accepted that the oppression suit comprised in the relief sought in prayers 8-12 of the further amended summons would be caught by the terms of the arbitration clause but maintained that the relief in the proposed derivative suit was not caught by the terms of the Deed at all. Perhaps, unsurprisingly, an oppression suit, as such, is not pleaded in the statement of claim. Rather, as noted above, the claims made against the second and third defendants involve allegations of breach of fiduciary duty and transactions with intent to hinder or defeat the plaintiffs as creditors of Samkara Holdings.
The submission for the first to third defendants is that the test as to whether there is a "matter" arising which is the subject of the arbitration clause is not whether the cause of action could be pleaded without reliance on the Deed or without raising a defence under the Deed. I agree. The test is that which was explained by the High Court in Hancock Prospecting.
In the present case, to the extent that the dispute raises questions as to dealings with the assets of the company the very subject of the proposed mechanism for valuation under the Deed and conduct alleged to frustrate the ability of the second and third defendants in certain circumstances to perform their obligations the Deed, then I consider that it falls within the arbitration clause construed broadly.
I accept that it is not possible to order the third-party defendants to arbitration (since they are not parties to the Deed). That raises case management issues as to how to deal with the balance of the disputes in circumstances where the disputes between the plaintiffs and the first to third defendants are in my opinion within the scope of the arbitration clause and should be stayed pending arbitration.
In circumstances where it is accepted by the plaintiffs that the disputes raised in the statement of claim will become otiose if the plaintiffs are indeed bought out of Samkara Holdings (pursuant to the mechanism provided for under the Deed) and there appears to be a dispute or potential dispute as to whether the valuation procedure has yet transpired, I consider it appropriate to refer the dispute as between the plaintiffs and the second and third defendants to arbitration and to stay the balance of the proceedings (including the claim for leave to bring a demonstrative suit) until the arbitral process has been determined, noting the mandatory nature of s 8 of the Commercial Arbitration Act and the policy of the Court to honour such clauses.
Of course, the de-registration of Samkara Holdings would make impractical any referral by the company to mediation or arbitration at this stage but that is not to the point.
As to the remaining clauses against the remaining defendants they should be stayed pending finalisation of the arbitration. I see no reason why costs should not follow that event.
For the above reasons, I make the following orders:
1. Pursuant to s 8 of the Commercial Arbitration Act and the inherent jurisdiction of the Court, order that the proceedings, so far as the claims by the plaintiffs against the second and third defendants, be stayed pending referral of the matter to arbitration pursuant to cl 38 of the Deed of Settlement and Release.
2. Pending completion of the arbitration the subject of Order 1, stay the present proceedings against the remaining defendants.
3. Order the plaintiff to pay the second and third defendants' costs of the stay application.