Khattar v Khattar; Fayad v Khatter

Court of Appeal (NSW)|2022-09-19|Before: Gleeson JA, Sackar J

Solicitors: O'Loughlin Westhoff (Applicants) Sage Solicitors (Respondent - Joseph Khattar) Madison Marcus (Respondent - Maria Fayad) File Number(s): 2022/142224; 2022/144444

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

Decision below

The appeals arise from a judgment of Sackar J delivered on 30 March 2022: Khattar v Hills Shoppingtown Pty Ltd (subject to a deed of company arrangement) [2022] NSWSC 363. On 21 April 2022, his Honour made orders entering judgment for the respondents against the appellants in various sums totalling $18,126,621.82 comprising an award of damages for breach of a deed of agreement dated 21 October 2016, as well as amounts of interest under s 100 of the Civil Procedure Act 2005 (NSW).
The first respondent, Carol, is the widow of the late George Khattar who died in 2010. He was the brother of the appellants, Joseph and Maria. The second and third respondents, Georgia and Alana, are the children of George and Carol.
In 2011, Joseph and Maria obtained a grant of probate of the will of their late brother, George, who left his estate to the respondents. The estate held a 25 per cent shareholding in Hills Shoppingtown Pty Ltd (Hills Shoppingtown) and 100 per cent shareholding in GK3 Pty Ltd (GK3).
In November 2015, the respondents commenced proceedings against Joseph and Maria in relation to the administration of the estate and sought revocation of probate, a grant of letters of administration and removal of Joseph and Maria as trustees and executors (the probate proceedings). Those proceedings were settled in 2016 by an agreement which was the subject of two deeds: a deed of settlement and a deed of agreement both dated 21 October 2016. The settlement was approved by Lindsay J on 25 October 2016 as Georgia and Alana were both minors.
The terms of the deed of agreement required Joseph and Maria to cause Hills Shoppingtown to complete a development of certain land in Western Sydney, including a strata sub-division, by 21 June 2018 (cl 3.8), and to "facilitate" the acquisition by GK3 as trustee of the GK3 Trust, of which each of the respondents were and are discretionary objects, of an unencumbered interest in 20 residential units (the Units) in the development which had been selected by the respondents (cl 3.4(a)) and which the parties acknowledged had an agreed value of $15,346,498.42 (cl 3.5). The deed also made provision for the transfer to GK3 of other properties described as "Replacement Units" to the value of the shortfall between the value of the Units and the value of the Units not otherwise acquired by GK3 in accordance with the deed (cl 3.7).
The deed provided that within 14 days from the date of the deed, Maria was to resign as director of GK3 and appoint Sam Fayad (her husband) as the sole director of GK3. In addition, within 7 days of the acquisition of the Units by GK3, control of GK3, and hence the GK3 Trust, was to pass to the respondents, with Sam Fayad to resign as sole director and secretary of GK3 and the appointment of Carol and her accountant as joint directors and secretaries of GK3.
In August 2019, the parties executed another deed, styled as a deed of acknowledgement, in which Joseph and Maria acknowledged their breaches of the earlier deeds, including cl 3.7(a) and cl 3.8(a), and agreed to pay monthly payments and organise the transfer of the Units to the respondents within an extended period of time. Joseph and Maria failed to comply with the condition precedent to the extension of time under this deed.
In the proceedings below, the respondents claimed that Joseph and Maria failed to honour their obligations under the deed of agreement, failed to cause the transfer of the Units within the extended time period and also defaulted in making certain monthly payments due under the deed of acknowledgement. As indicated, the respondents' claims were successful and judgment for a substantial sum in excess of $18 million was entered against the appellants. Neither Joseph nor Maria has sought a stay of the judgments against them.

Special circumstances

Special circumstances must be shown before an order for security for costs of an appeal can be made under Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 51.50.
The respondents directed attention to Preston v Harbour Pacific Underwriting Management Pty Ltd [2007] NSWCA 247 at [18] where, after referring to earlier authority, the following principles were identified by Basten JA (Ipp JA and Hoeben J agreeing): (1) no order for security should be made in the absence of 'special circumstances'; (2) consideration of what may constitute special circumstances should not be fettered by some general rule of practice; (3) impecuniosity, without more, will usually be insufficient; (4) an order may be appropriate if the appeal is shown to be hopeless, unreasonable or of an harassing nature; (5) where a bona fide and reasonably arguable appeal would be stifled by an order for security, such an order should usually not be made, and (6) the subject matter of the appeal, including an issue as to the liberty of the individual, or a public interest may provide a reason for not imposing a security order which would stifle the continuation of the appeal.
The last two factors, it was suggested by Basten JA, might better be seen as exercising the discretion rather than as potential special circumstances.
When weighing all the circumstances of the case in the exercise of the discretion to order security for costs (assuming the test of "special circumstances" is satisfied), it is necessary to keep in mind that the weight to be given to any circumstance depends not only on its own intrinsic persuasiveness, but upon the impact of the other circumstances which have to be weighed: P S Chellaram & Co Ltd v China Ocean Shipping [1991] HCA 36; (1991) 102 ALR 321 at 323 per McHugh J.

Submissions

The respondents submitted that the following matters constituted special circumstances justifying an order for security for costs of the appeals: 1. the appellants have not paid the judgment debt; 2. there is a real risk, if the appeals are unsuccessful, that the respondents will not be able to recover their costs of the appeals from Joseph and Maria; 3. Joseph and Maria have frustrated attempts to enforce the judgment; and 4. the lack of merit of the appeals.

Non-payment of judgment

Given that the judgment would be set aside if the appeals were successful, the failure to pay the judgment is not of itself a special circumstance warranting a stay pending the provision of security for costs of the appeal: Xenos v FAL Healthy Beverages Pty Ltd [2017] NSWCA 240 at [45], citing Pi v Zhou [2017] NSWCA 16 at [63] (Payne JA and Sackville AJA agreeing).

Risk that costs will not be recoverable and frustration of attempts to enforce the judgment

It is convenient to address these factors together as they are connected. The respondents point to three matters: first, the financial position of Joseph and Maria; second, the history of prior defaults by Joseph and Maria in their obligations to the respondents; and third, the frustration of the respondents' attempts to enforce the judgment.
As to Maria's financial position, the evidence tendered by the respondents established that she is impecunious. In a financial statement signed by Maria dated 27 May 2022, in response to an examination notice issued by the respondents under UCPR, r 38.1, Maria acknowledged a deficiency in her net assets in excess of $17 million. The total value of property owned by her was stated as approximately $5.3 million and her total liabilities were stated as approximately $22.571 million, of which an amount was said to be owing in respect of "ATO debt & personal guarantee" of $20,051,489.
As to Joseph's financial position, he ignored the examination notice dated 26 April 2022 issued under UCPR, r 38.1, sent to his solicitor. No explanation was proffered for his non-response. Real property and company searches by the respondents' solicitors reveal that Joseph owns three residential properties in New South Wales: at 1 Amos Street, Westmead and 23-25 Hassall Street, Westmead, in each case as co-owner with his wife, and at 39 Wilkins Street, Yagoona. Each property is mortgaged. Joseph's equity in those properties is unknown. He also holds shareholdings in no less than 36 proprietary limited companies; again, the value of those interests is unknown.
Whilst not advancing any evidence on the topic, nor explanation for Joseph's failure to answer the examination notice, senior counsel for Joseph submits that the evidence adduced by the respondents does not demonstrate that Joseph is impecunious. That submission ignored several important matters: (a) the judgment debt in excess of $18 million remains unpaid, (b) in response to a garnishee notice served on the Arab Bank on 28 April 2022, the Bank advised that the credit balance of Joseph's account was less than $100 (Ex JEO, p 101), (c) the purchase price of Amos Street, Westmead in November 2007 was $1.32 million and the mortgage to Westpac is stamped for duty purposes at $2.9 million (Ex JEO 1, p 209, 202), (d) the mortgage over Hassall Street Westmead is stamped for duty purposes at $1.6 million (Ex JEO 1, p 218), and (e) it is fanciful to think that Joseph's equity in the three residential properties would be sufficient to meet the judgment debt. This evidence, taken together with Joseph's unexplained failure to answer the examination notice, justifies an inference that there is a real risk that the respondents, if successful, will not be able to recover their costs of the appeals from Joseph.
Next, the respondents say that the appeals cannot be seen as merely the second round of ordinary litigation, rather they should be viewed in the context of the prior history of defaults by Joseph and Maria following the compromise of the probate proceedings in October 2016, specifically the default under the deed of agreement in 2018 which was acknowledged in the deed of acknowledgement in August 2019 and the further default under the deed of acknowledgement leading to the commencement of the proceedings below. The respondents say that given the history of these defaults, it is unlikely that Joseph and Maria would voluntarily comply with any costs order made against them if their appeals are unsuccessful. I accept that submission.
As to the evidence of frustration of the respondents' attempts to enforce the judgment debt, Maria says that the respondents have not exhausted their enforcement options, such as taking further steps in respect of the examination notice or issued a bankruptcy notice, whilst Joseph says that he was cooperative when officers from the Office of the Sherriff of New South Wales attended his home to enforce a writ of levy of property, without success. Neither submission negates the inference that Joseph and Maria have both, to some extent, frustrated the respondents' attempts to enforce the judgment.
As to Maria, attempts to levy execution against her goods have reached a standstill in circumstances where the Office of the Sheriff has attempted to make contact with her via letters, calling cards and two attempted in-person attendances at her residential address in order to attempt to levy execution of the writ, all to no avail. The evidence is that a large security gate on the boundary of Maria's residential premises has presented a practical impossibility of physically reaching her. Requests by the respondents' solicitors made to Maria's solicitors to nominate a date and time to be present to allow the writ to be executed at her residential premises by the Sheriff have been ignored. It is not to the point that the respondents have not pursued other enforcement options against Maria; she is impecunious. The available inference is that Maria has frustrated attempts by the respondents to enforce the judgment by the writ of levy of property.
As to Joseph, accepting that he was cooperative on the occasion that officers from the Office of the Sherriff attended his home to enforce a writ of levy of property without success, it is of greater significance that he has failed without explanation to answer the examination notice. Had he done so, he would have disclosed his source of income and expenses, and his assets and liabilities and their respective value and amount, which would have assisted the respondents in identifying any assets against which enforcement steps might have been taken with likely success. The available inference is that Joseph has frustrated attempts by the respondents to enforce the judgment, by not disclosing such information as requested by the examination notice.
I accept that there is a real risk that the respondents, if successful, will not be able to recover their costs of the appeals from Joseph or Maria, and when combined with the frustration of the respondents' attempts to enforce the judgment against each of them, this constitutes special circumstances.

Nature and merits of appeal

As to the fourth matter, the asserted lack of merit of the appeals is a relevant consideration. It is necessary, however, to be mindful of the difficulty in making an assessment of the merits of the appeals on the limited materials available on the present application.
Insofar as there is a degree of overlap of the grounds in Joseph's appeal and Maria's appeal, the appeals essentially raise the following common issues: 1. the construction of the deed of agreement, specifically the appellants' obligations in cl 3.4, 3.7 and cl 3.8, and a challenge to finding of breach of cl 3.7(a); 2. the no loss argument, including the absence of any pleading of a loss of chance claim; 3. the failure to reduce damages by the costs, including stamp duty, referable to the transfer of properties from the GK3 Trust to the respondents; 4. a challenge to the factual finding that Carol would have caused the GK3 Trust to transfer the Units to herself and her children.
The respondents say that the appeals lack merit and are hopeless. They say that Joseph and Maria seek a rehearing on most, if not all, of the defences raised below which were rejected by the primary judge, who described some of them as "misconceived" (at [162]), or as "entirely unconvincing" and a "red herring" (at [172]). They contend by analogy with Ballard v Brookfield Australia Investments Ltd [2012] NSWCA 434 at [27]-[28] (Ward JA) that the scope of the appeals seek to agitate almost all of the factual and legal issues raised at trial and that there is a "very real risk that costs will be unnecessarily incurred by the respondents to the appeal (in the sense that if the appeals were confined to more narrow grounds of appeal those costs would be minimised)": Ballard at [28]. Such an approach by an appellant is capable of qualifying as "special circumstances" for the purposes of r 51.50.
Having reviewed the judgment of Sackar J and the notices of appeal, I consider the "kitchen sink" analogy to be overstated in relation to the appeal by Joseph, and to the extent of the common grounds in Maria's appeal.

Joseph's appeal

Given the limited nature of the exercise which this Court can properly undertake in assessing the merits of an appeal at this stage of the proceedings, especially without the assistance of either the appellants' or the respondents' submissions, I make the following observations in relation to the merits of Joseph's appeal.
First, senior counsel for Joseph candidly acknowledged that the arguments based on construction of cll 3.4 and 3.8 of the deed of agreement, and cl 3.7 concerning whether the Replacement Units were offered to the respondents, are not particularly strong. That concession was appropriate given that breach of cll 3.7(a) and 3.8(a) was admitted by Joseph and Maria in the deed of acknowledgement dated 1 August 2019, and breach of cl 3.7(a) was also the subject of a factual finding: at [147]. The notice of appeal does not grapple with what needs to be established for an appeal against such a finding to succeed, especially in circumstances where Joseph and Maria did not adduce evidence from Sam Fayed that he (on their behalf) ever provided details of or offered Replacement Units to Carol.
Second, the challenge to the factual finding that Carol would have caused GK3 as trustee of the GK3 Trust to distribute the Units to herself and her daughters, also suffers from the difficulty that the notice of appeal does not grapple with what needs to be established for an appeal against such a finding to succeed insofar as it was based on the credibility or reliability of Carol's evidence: Fox v Percy (2003) 214 CLR 118; [2003] HCA 22 at [29]-[29]; Robinson Helicopters Co Inc v McDermott [2016] HCA 22; (2016) 331 ALR 550 at [43].
Third, whilst Joseph correctly accepted that the respondents have standing to sue for loss suffered by them for breach of the deed of agreement, the argument that the respondents suffered no loss because GK3 was not permitted to distribute any capital to a beneficiary so long as it was bound by prior charges in favour of ANZ Fiduciary Services Pty Ltd, and later, Persephone Co Pty Ltd, involves a most unlikely construction of the deed of agreement.
The argument ignores that the suggested impediment to GK3 distributing the Units or their proceeds of sale to the respondents as beneficiaries of the GK3 Trust is inconsistent with the subject matter of the promise by Joseph and Maria in cl 3.4(a) to "facilitate" the acquisition by GK3 of an unencumbered interest in the Units, as is apparent from Joseph and Maria's acknowledgment in cl 3.4(b) that they have sought the consent of the JV Companies (which included GK3) to facilitate the action required in accordance with cl 3.4(a), the express reference to the agreed value of the Units in cl 3.5(a), the mechanism for valuation of the Replacement Units in cl 3.7 and the acknowledgment in cl 3.4(d) that GK3's interest in the unincorporated joint venture would be satisfied upon acquisition of the Units by GK3.
Moreover, the argument that cl 3.4(a) did not require Joseph and Maria "to free GK3 from its encumbrances" mischaracterises the nature of their obligation and its temporal significance. What they were required to facilitate was the acquisition by GK3 of unencumbered Units as trustee of the GK3 Trust with an agreed value in excess of $15 million. Performance of that obligation directed attention to the position at the time of acquisition of the Units by GK3, in the context of the general security deed granted by GK3 in favour of ANZ Fiduciary which gave security over its property, including the property and after-acquired property of the GK3 Trust. Given that the general security deed attached to after-acquired property of the GK3 Trust, GK3 could never acquire an unencumbered interest in the Units unless ANZ Fiduciary had agreed to exclude the Units from its security and gave its prior written consent to the distribution of the Units or their proceeds of sale by GK3 to the respondents as beneficiaries of the GK3 Trust (see cl 8.3(a) of the general security agreement dated 17 March 2016).
Thus, performance of the obligation in cl 3.4(a) was not a matter so much of "freeing" GK3 from its existing encumbrances to ANZ Fiduciary, rather it was matter of obtaining the agreement of ANZ Fiduciary, before the acquisition of the Units by GK3, that the after-acquired property of the GK3 Trust in the form of the Units (or any Replacement Units or cash equivalent in respect of any shortfall in value paid to GK3) was excluded from the security held by ANZ Fiduciary and could be distributed by GK3 to the beneficiaries of the GK3 Trust without breach of the undertakings it had given to ANZ Fiduciary in the general security agreement. Otherwise, the Units received by GK3 would not be unencumbered.
Fourth, the merits of the alternative arguments directed to reduction in damages, fall into a similar category to the no loss argument.
Notwithstanding the major difficulties with the no loss argument adverted to above, it is not possible to conclude at this preliminary stage that this argument is hopeless. In these circumstances, I do not consider that the nature or merits of Joseph's appeal is a matter that constitutes special circumstances.

Maria's appeal

Whilst I take the same view in relation to the common grounds in Maria's appeal, the position is different insofar as Maria's appeal includes grounds which reagitate matters advanced below and otherwise have very weak prospects of success, namely:

the challenge to the primary judge's description of the "heart" of the probate proceedings (ground 1),
the challenge to the finding that it was open to the respondents to accept Joseph and Maria's alleged repudiation of the deed of agreement (ground 4(e)),
the challenge to the findings at [164] and [165] that the respondents can sue personally for loss suffered by them (ground 5),
the challenge to the constitution of the proceedings because GK3 was not a party (grounds 7 and 8),
the contention, attributing to the primary judge a finding that the respondents' case should properly be seen as one of a loss of chance or opportunity, when no such finding was made by his Honour (ground 11),
the contention that the respondents were not deprived of the benefit of the transfer of the Units to GK3, when plainly there were (ground 12), and
the challenge to the finding that Maria is not entitled to any indemnity from the assets of the Trust (ground 13).

With respect to these grounds, the "kitchen sink" analogy is appropriate, and for this reason there is a real risk that costs will be unnecessarily incurred by the respondents to the appeal in addressing these grounds. That constitutes special circumstances with respect to Maria's appeal.

Conclusion on special circumstances

Whilst impecuniosity without more will usually not be sufficient to justify an order for security for costs of an appeal, here there are additional matters which, in combination, are capable of constituting special circumstances being the very weak prospects of several of Maria's grounds of appeal, the frustration of the respondents' attempts to enforce the judgment against both Joseph and Maria, and the substantial risk that, if successful, the respondents will not recover their costs of the appeal. I am satisfied that the power to award security for costs is engaged.

Discretion

Turning to the exercise of discretion, accepting that the no loss argument cannot be said to be hopeless, and balancing the other considerations including the absence of any submission by Joseph and Maria that the appeals would be stultified if security was ordered, the apparent willingness and ability of Joseph and Maria to find the resources to fund their own costs of the appeals and the substantial risk that, if successful, the respondents will not recover their costs of the appeals (Starr-Diamond v Diamond [2013] NSWCA 7 at [19] (Hoeben JA)), I am satisfied that the Court ought to exercise its discretion in favour of awarding security for costs.

Quantum

The appeals are listed for hearing for two days on 17 and 18 November 2022. The total security sought is lower than the unchallenged estimate by the respondents' solicitor of the costs of the appeal, being an amount of $77,960. Neither Joseph nor Maria submits that the amount of security sought is excessive.
I propose to order that each of Joseph and Maria provide security for costs in the sum of $35,405 by payment into court. The proceedings will be stayed pending the provision of such security. There is no reason why costs of the motions should not follow the event: UCPR, r 42.1.

Orders

In each appeal, the Court makes the following orders: 1. The appellant to provide within 14 days security in the sum of $35,405 for the respondents' costs of the appeal by payment of that amount into court. 2. The appeal be stayed until the appellant has complied with order 1 above. 3. The appellant to pay the respondents' costs of the motion filed 22 August 2022. 4. Grant liberty to apply on two days' notice in relation to any proposed alternative manner of provision of the security referred to in order 1 above.

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: 21 September 2022

At a glance

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Judgment (16 paragraphs)

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