Nadinic v Drinkwater

Nadinic v Drinkwater - [2016] NSWCA 377 - NSWCA 2016 case summary — Zoe

Judgment

HIS HONOUR: This is an application made during the Court vacation for a stay of orders made in the Equity Division by Pembroke J on 9 December 2016, consequent upon his Honour's judgments of 30 September 2016 and 9 December 2016 in Drinkwater v Nadinic [2016] NSWSC, 1364 and 1733 respectively.
The proceedings below related to a joint venture for the development and sale of units in a multi-storey building. After the parties fell into dispute, extensive negotiations occurred. These culminated in the execution of a Deed of Settlement which provided for Ms Drinkwater to purchase Mr Nadinic's interest in the venture for the sum of $2,050,000, to be payable, as events transpired, on 30 June 2016. The debt was secured by a registered mortgage over the subject land granted by Ms Drinkwater to Mr Nadinic. Interest at the rate of 10% was to accrue on the debt until payment.
The primary judge held that Ms Drinkwater was entitled to have the Deed and Mortgage set aside because Mr Nadinic, a fiduciary by reason of his status as a joint venturer, failed to disclose that the development company (Brooks Parade Pty Ltd), whilst under his control, caused $923,589 representing GST input tax credit refunds to which it was entitled, to be paid, not to itself, but to a company (Maxstra Constructions Pty Ltd). Maxstra Constructions was effectively controlled by Mr Nadinic.
His Honour found that "Brooks (when controlled by [Mr Nadinic]), Maxstra NSW [the builder for the purposes of the development] and Maxstra Constructions were involved in a scheme to manipulate the GST system for the ultimate advantage of Maxstra Constructions" and that this was achieved by Maxstra NSW issuing invoices to Brooks for amounts far in excess of the costs of construction ([21] and [22] of the first judgment).
His Honour accepted Ms Drinkwater's unchallenged evidence that if she had known that Maxstra Constructions had received GST refunds of $923,589 to which Brooks was entitled, she would not have agreed to pay Mr Nadinic the sum of $2,050,000. His Honour said that Ms Drinkwater "may have been anxious to finalise the negotiations but she did not expect perfidy and crookedness" and that if the payment of the funds to Maxstra Constructions had been revealed to her "the complexion of the negotiations would have changed. The outcome would probably have been different" ([30] and [31]).
In his Notice of Appeal Mr Nadinic asserts that there was no fraud or other dishonesty in relation to what occurred concerning GST. This reflects the submission in his Statement of Facts and Issues lodged at first instance that the input tax credit refund received by Brooks from the Australian Tax Office ("ATO") was equal to a liability Brooks had to Maxstra NSW. Brooks, it was said, discharged that liability by payment to Maxstra Constructions at the direction of Maxstra NSW and that Maxstra NSW in turn accounted to the ATO for the GST it had collected from Brooks.
In his Notice of Appeal Mr Nadinic also contends that no allegation of fraudulent or other dishonest conduct formed part of Ms Drinkwater's case at first instance. This assertion derives some support from the Statements of Issues and written submissions lodged at first instance by both parties but its merit will need to be assessed by reference to the complete record of the proceedings below.
The relevance of these contentions is that the primary judge's conclusion about the materiality to Ms Drinkwater of knowledge that the GST refund was paid to the Maxstra companies was arguably dependent upon his finding that the payment was made in pursuance of a scheme to defraud the ATO: hence his Honour's point that knowledge of Mr Nadinic's putative dishonesty would likely have affected the outcome of the negotiations. There was no alternative finding that, absent the existence of a fraudulent scheme, the GST payment to the Maxstra companies was of such materiality that it required disclosure and, failing that disclosure, the Deed of Settlement and Mortgage ought be set aside.
On the basis of limited material and in the limited time available at this stage, I have concluded that the above circumstances raise serious issues to be litigated on appeal. To them I add a question likely to arise of whether the orders and findings made below were appropriate when parties to the Settlement Deed and the postulated scheme to defraud the ATO were not parties to the proceedings.
On the balance of convenience, it is significant that to secure Ms Drinkwater's promise of payment of $2,050,000 to Mr Nadinic, Mr Nadinic obtained a registered Real Property Act mortgage. If a stay is not granted, Mr Nadinic will, at least in part, lose the benefit of this security and, if he succeeds on his appeal, become only an unsecured creditor of Ms Drinkwater.
There is presently an amount of $1,437,293.93 in a bank account in the names of the solicitors for the parties. It contains the net proceeds of sale of some of the units. Ms Drinkwater wishes to withdraw $1,000,000 from that account. She contends that, because the account was established under an interlocutory regime, the final orders of Pembroke J (if not stayed) render her entitled to the whole of the funds in the account. If the orders are stayed, she would have to approach the Equity Division for an order releasing some or all of the funds as the agreed interlocutory regime precluded withdrawals without an order of the Court.
Ms Drinkwater asserts that $524,902 of the $1,000,000 that she seeks to withdraw is required to meet a GST liability. She has not informed the Court of the intended application of the balance of the proposed withdrawal.
In my view the orders made below should be stayed to preclude Ms Drinkwater having unrestricted access to the funds in the controlled monies account. These funds represent part of Mr Nadinic's security for payment of the purchase price of his interest in the joint venture because they comprise the proceeds of sale of parts of the development over which his mortgage extended. It would be unfair to him to deprive him of his security before the apparently arguable appeal he has brought is determined. Leaving aside the GST payment proposed to be made from a withdrawal from the controlled monies account, Ms Drinkwater has not led evidence that she would suffer any particular prejudice if she did not have access to the controlled monies account. Her silence as to what she intends to do with the balance of the withdrawal is noteworthy.
As to the intended GST payment, it is has not been established to my satisfaction that there are funds in the controlled monies account which, under to the arrangements between the parties (as they remain operative if the orders of Pembroke J are stayed), Ms Drinkwater is entitled to have applied to a GST liability. Matters relevant to that issue include the nature and timing of the liability; whether the funds deposited to the account have any connection with the liability; and whether any amounts in the account should have been applied to the relevant GST payment rather than being deposited to the account. Ms Drinkwater will have to apply to the Equity Division if she wishes to seek an order pursuant to the interlocutory agreement between the parties for a payment to her out of the account for this or any other purpose.
A corollary of my conclusion that the status quo should be maintained by staying the orders made below is arguably that Ms Drinkwater is entitled to an interlocutory injunction preventing Mr Nadinic enforcing the Deed of Settlement and Mortgage before the determination of Mr Nadinic's appeal. No such application is presently before the Court.
It is appropriate that the orders below should be stayed until the determination of the appeal, and not just until the end of the Court vacation. My order granting this stay will not preclude Ms Drinkwater applying to lift the stay on the basis of substantially augmented evidence (if she can explain why the evidence was not adduced before me) or for some other good and proper reason. One possible reason for a further application would of course be the speed with which Mr Nadinic's application has been heard and determined.
For these reasons I make the following orders: 1. The orders of Pembroke J made on 9 December 2016 are stayed until the determination of the appeal. 2. The costs of the stay application are to be costs in the appeal.

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