Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2014] NSWCA 231 | Case summary

Judgment 1HIS HONOUR: This is an application for a stay pending appeal concerning a judgment of McDougall J given on 12 May 2014 to take effect from 1 May 2014: Mushroom Composters v Robertson (No 2) [2014] NSWSC 552. The proceedings in the Court below were heard over five days from 10 February to 14 February 2014 and his Honour gave reasons for judgment on 4 March 2014: Mushroom Composters v IS & DE Robertson Family Trust [2014] NSWSC 164 (the principal reasons). 2The applicant (Composters) claimed that the respondent (Robertson) had breached seasonal contracts for the supply of straw by Robertson to Composters for the 2008/2009 and 2009/2010 seasons in various ways. By its cross-claim Robertson contended that the straw supply contract was actually a four year contract, which Composters had by its conduct repudiated, and that Robertson had accepted that repudiation as discharging the contract and in consequence claimed damages. 3In his principal reasons his Honour found that Composters succeeded on its claim but only in one respect and quantified its damages at $27,815 (exclusive of GST), before interest. His Honour also found that Robertson succeeded against Composters on its cross-claim on the basis that the straw supply contract was a four year contract. It was conceded by Composters that if this was the case then Composters had repudiated it by its conduct at, and following, a meeting in June 2010: principal reasons at [228]. 4His Honour assessed Robertson's damages in respect of the 2009/2010 season as $808,328 and in respect of the two subsequent seasons provisionally assessed damages as $311,570 and $202,521. He invited the parties to consider the methodology which he had proposed for the calculation of damages and also to provide further submissions on the questions of interest and costs. These matters were dealt with in his Honour's second judgment, the outcome of which was that, after set-off of judgments, judgment was given for Robertson against Composters in the sum of $1,556,260 to take effect from 1 May 2014, and Composters was ordered to pay Robertson's costs of the action and the cross-claim. 5On 27 May 2014 the applicant filed a notice of appeal. The stated grounds of appeal concern his Honour's finding that the straw supply contract was for a term of four years (rather than a contract for a one year term to be renegotiated annually between the parties), the finding of breach of contract for the 2009/2010 season, and the award of damages for the 2009/2010, 2010/2011 and 2011/2012 seasons. 6The principles to be applied when exercising the Court's power to grant a stay pending an appeal are well known: see Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 at 694-695, and Kalifair Pty Ltd v Digi-Tech (Australia) Ltd (Kalifair) [2002] NSWCA 383; 55 NSWLR 737 at 741 [17]-[20]. 7Prima facie the successful party is entitled to the benefit of a judgment, but a stay may be granted where an applicant demonstrates an appropriate case to warrant the exercise of discretion in its favour. The mere filing of the appeal is insufficient, of itself, to demonstrate such a case. Usually it is demonstrated by showing that there are arguable grounds of appeal and that there is a significant risk that if money is paid it will be unable to be recovered if the appeal succeeds or by demonstrating that unless a stay is granted the appeal will be rendered nugatory: TCN Channel 9 Pty Limited v Antoniadis (No 2) (1999) 48 NSWLR 381 at 385 [15]. It is for the applicant to demonstrate a proper basis for a stay that will be fair as between the respective interests of the parties: see Alexander v Cambridge Credit Corporation Ltd at 694; Adeels Palace Pty Ltd v Moubarak [2009] NSWCA 130 at [2]. 8A successful party is entitled to be protected, as far as practicable, from the risk that if the appeal fails assets which earlier were available to satisfy the judgment will no longer be available for that purpose. It is for this reason that an appellant may be required to provide appropriate security as the price of a stay which may make the judgment creditor a secured creditor. Nonetheless a requirement for security is only intended to protect the status quo, that is the existing value of the judgment, and not to improve the position of the judgment creditor by increasing that value: Kalifair at [28]. 9In their written submissions both parties took extreme positions as to whether the appeal is an arguable one. The applicant contended that the appeal is strong. The respondent contended that there is no arguable appeal. However, in oral argument counsel for the respondent moderated his position. He accepted that the appeal is an arguable one, but contended that the difficulties with the appeal grounds identified in the respondent's written submissions should weigh in the scales against a stay of the judgment below. Having considered the grounds of appeal and the competing submissions of the parties, I proceed on the basis that the appeal is arguable but not necessarily strong.

Balance of convenience 10The questions to be considered on the present application concern the balance of convenience or the balance of hardship if the applicant is required to satisfy the judgment immediately. The principal issue is the creditworthiness of the respective parties. 11The applicant relies upon its own financial position as being a factor in favour of the grant of a stay. It says that, although it has some net assets, these are insufficient to enable it to satisfy the judgment in whole and if a stay is not granted it can be expected that the respondent will move to issue a creditor's statutory demand and seek an order for the winding up of the applicant. The respondent previously served a statutory demand on the applicant on 9 June 2014 claiming payment of the judgment debt. This demand was only withdrawn after the applicant filed its notice of motion on 23 June 2014 seeking a stay of the judgment. 12There is unchallenged evidence that the net assets of the applicant (approximately $760,000) are insufficient to meet the judgment and its liability for costs. (The respondent's actual costs below exceed $500,000). However, there is also evidence that the applicant has been trading at a loss since 2007 and is incurring losses of about $35,000 to $45,000 per month (at least) up until recently. The applicant recorded a loss of approximately $363,000 in the nine months ending 31 March 2014. 13In a second affidavit Dr Martin, the applicant's general manager, deposed that he expects that there will be a net profit of approximately $206,000 in the last quarter ending 30 June 2014. This would reduce the applicant's loss for the 2013/2014 financial year to approximately $150,000. (The evidence did not reveal the extent to which there has been any increase in the applicant's net assets as at 30 June 2014, taking into account the anticipated net profit in the final quarter of the last financial year.) Dr Martin explained this recent improvement in the applicant's financial performance as reflecting an increase in weekly tonnage sold by the applicant over the course of 2013/2014 financial year. 14Dr Martin also stated his belief that the weekly tonnage achieved in the fourth quarter of the 2013/2014 financial year will continue for the remainder of 2014. However the weight that can be given to this evidence is somewhat limited as it is based upon no more than verbal indications given to Dr Martin by the applicant's major customers as to their anticipated orders for the next six months. There is no evidence of binding contracts with the applicant's customers, or as to the likely profitability of the applicant's business beyond December 2014. Counsel for the applicant fairly acknowledged that in view of its history of financial losses, one could only speculate as to the applicant's likely financial performance beyond the end of this year. 15The practical problem is this. 16On the one hand, the respondent, which is the trustee of a family trust, ceased trading some time ago (when the applicant repudiated the contract) and is presently without financial means, other than support provided by Mr and Mrs Robertson, who are its directors and major creditors and who are said to be owed approximately $2 million by the company. The respondent relies upon the support it receives from Mr and Mrs Robertson to defend the appeal. However this support is said to be at risk because of Mr and Mrs Robertson's personal financial position. They are in default on personal loans and overdraft facilities with Westpac Banking Corporation (Westpac) totalling approximately $700,000, and also owe Westpac approximately $100,000 in respect of loans for the purchase of machines previously leased to the respondent which have since been sold. Those loans are secured over the family home of Mr and Mrs Robertson in Narromine, which is said to be valued at approximately $730,000, and a shed at Trewilga, said to be valued at approximately $190,000. It may be seen that the stated value of those two properties slightly exceeds the amounts owing to Westpac. Mr Robertson deposed that he and his wife have approached several banks, including the National Australia Bank (NAB), seeking to refinance the amounts owed to Westpac. There was also evidence of an approach made to the Commonwealth Bank, but no evidence of the outcome of any of these approaches. 17The respondent says that if security is provided in respect of the judgment debt, pending the determination of the appeal, this will assist Mr and Mrs Robertson in their negotiations with Westpac and their attempts to refinance with NAB and reduce the likelihood of Westpac enforcing its loans and securities. Although there was no direct evidence of the attitude of Westpac or NAB, I am prepared to infer that the provision of security for the judgment debt would likely reduce the risk of the respondent losing the support of Mr and Mrs Robertson in its defence of the appeal, because the risk of enforcement action by Westpac against Mr and Mrs Robertson is likely to be reduced if they can demonstrate that at least part of the judgment debt will be paid to the respondent if the appeal is unsuccessful. 18On the other hand, the applicant is concerned that if it satisfies the judgment, at least, by payment in part (the applicant conceding that it is unable to satisfy the whole of the judgment) there is a significant risk that the respondent will be unable to repay the money without difficulty or delay if the appeal were to succeed: TCN Channel 9 Pty Limited v Antoniadis (No 2) at [15]. So much was accepted by the respondent. The applicant says that because such a risk exists the respondent should be denied the fruits of its judgment pending appeal. 19It may be accepted that if a stay is not granted the respondent will pursue winding up proceedings against the applicant. It may also be inferred that there is a real risk that the making of a winding up order may stifle the appeal. I say "may" because it is not apparent as to the extent to which the applicant may be able to call upon others, such as its shareholders, to assist it. Nonetheless, it seems most unlikely that the applicant would be able to pursue the appeal, from its own resources, unless a stay is granted. 20I am also satisfied that there is a significant risk that the respondent would be unable to repay any money without difficulty or delay, if the appeal were to succeed. The respondent's ability to do so would be dependant upon any support it might be able to obtain from Mr and Mrs Robertson. No undertakings were forthcoming from Mr and Mrs Roberson to militate this risk. 21Taken together these two factors support the grant of a stay. However a stay must be fair as between the respective interests of the parties. If a stay were to be granted, the respondent would lose the right to proceed immediately to wind up the applicant and would be faced with the risk that the applicant's financial position might deteriorate before future winding up proceedings could be commenced. Since the applicant has been trading at a loss since 2007 (other than for the three months of April to June 2014) there is an appreciable risk that those losses will continue, at least to some extent, pending the determination of the appeal. 22One practical solution would be to order a stay of execution on condition requiring the applicant provide security for part of the judgment debt. 23Counsel for the applicant informed the Court during oral argument that the applicant was prepared to provide a bank guarantee up to an amount of $500,000 as a condition of any stay of the judgment debt. This condition was acceptable to the respondent and the difference between the parties was narrowed to the amount of security required. 24The applicant argued that security of $250,000 would be sufficient in the circumstances. This amount was arrived at upon the basis that the applicant anticipates a loss of approximately $150,000 for the year ending 30 June 2014, and anticipates that profitable trading will occur in the next six months but is unable to forecast what its likely future performance will be beyond that period. The respondent sought security of $500,000. 25It is difficult to be precise as to the likely quantum of the prejudice which may be suffered by the respondent if the applicant's net assets are diminished by further trading losses pending the determination of the appeal. Doing the best I can, on the limited information available, it seems to me that security of $400,000 should be provided by the applicant as a condition of any stay of the judgment. 26In reaching this view I take into account the evidence of the sustained losses suffered by the applicant since 2007, the quantum of monthly losses in the 9 month period to 31 March 2014 of about $35,000 to $45,000 per month, and the degree of uncertainty as to the applicant's likely future financial performance notwithstanding the recent improvement over the last three months to 30 June 2014. 27The applicant's counsel proposed that security be provided by way of bank guarantee. The respondent's counsel did not object to this form of security. The bank guarantee should be in favour of the Registrar of the Court in the normal way. 28Costs in the present application will be costs in the appeal.

Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd

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