Perpetual Nominees Limited v Taouk & Anor

LEGISLATION CITED : Real Property Act 1900 Uniform Civil Procedure Rules 2005

Finn v Carelli [2007] NSWSC 261 Frigo v Culhaci (NSWCA 17 July 1998, unreported) CASES CITED : Newcastle City Council v Caverstock Group Pty Limited [2008] NSWCA 249 Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 321-322 Perpetual Nominees v Springfield Retail Pty Ltd [2009] NSWSC 188 Vaughan v Duncan [2007] NSWSC 811

Perpetual Nominees Limited - Plaintiff PARTIES : Karam Elias Taouk - First Defendant Jim George - Second Defendant

COUNSEL : Ms L Young - Plaintiff Mr CN Bova - First Defendant

SOLICITORS : Bartier Perry - Plaintiff Marque Lawyers - First Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

11740/2009 - PERPETUAL NOMINEES LIMITED v Karam Elias TAOUK & Anor

JUDGMENT 1 HIS HONOUR: Nature of proceedings This matter was heard in the Duty Judge List on Tuesday, 9 June 2009. 2 In the principal proceedings, the plaintiff alleges that it loaned in excess of $5.1 million dollars to Solid Holdings Pty Limited ("Solid"). The loan was secured by a mortgage, charges and deeds of guarantee. The first defendant, Karam Elias Taouk, and the second defendant, Jim George, were the guarantors. Solid defaulted in its obligations under the loan agreement and is currently in liquidation. The plaintiff claims from the defendants as principals under their guarantees the amount of the loan and outstanding interest payments. 3 On 4 June 2009 the plaintiff by way of a Notice of Motion made an ex parte application to the Registrar of the Court. It sought an order that caveat AE111568, lodged over property at 28 Water Street, Belfield NSW (the Belfield property), be extended until further order of the Court. It sought an asset preservation order (a "freezing order") in respect of the assets of the defendants to the value of $5,600,000. It also sought orders for substituted service on Mr Taouk by service on his solicitors. The Registrar made those orders. The matter came before me as Duty Judge for the continuation of the orders made by the Registrar. Mr Taouk does not challenge the orders for substituted service but opposes the extension of the other orders. 4 After the Registrar had made these orders, the plaintiff learned that the second defendant, Mr George, had been made bankrupt. Accordingly, it is common ground that the orders made by the Registrar against him will have to be discharged.

Factual Background 5 Although the loan to Solid was secured in part by a mortgage, that mortgage did not relate to the Belfield property but to other properties at Bondi (the Bondi properties). The Belfield property was not in terms referred to in any of the loan documentation. 6 The caveat AE111568 in respect of the Belfield property was lodged on 25 July 2008. The owner of the property is Mr Taouk. The plaintiff described its caveatable interest in the Belfield property as: "Equitable mortgage of an estate in fee simple of the land pursuant to the guarantee of indemnity dated 31 May 2007."

On 21 May 2009 the plaintiff received a lapsing notice in relation to that caveat which would, absent further order of the Court, take effect on 11 June 2009. 7 There was another caveat lodged against the Belfield property. That caveat was lodged in June 2008 on behalf of IMFML Finance Pty Limited. It claimed "an equitable interest in the land described in Certificate of Title Folio Identifier … pursuant to registered mortgage AD560609, Deed of Loan dated 9 November 2007, Supplementary Deed of Loan dated 27 December 2007 and Deed of Guarantee and Indemnity dated 9 November 2007". The strength or otherwise of the interest claimed by IMFML Finance Pty Limited is not known. Nor is it known whether or not Mr Taouk has served a lapsing notice in respect of that caveat. IMFML Finance Pty Limited was placed in liquidation in November 2008. 8 By letters dated 27 May 2009 and 3 June 2009 the solicitors for the plaintiff sought particulars from Mr Taouk as to his intentions in relation to the Belfield property and an undertaking that he would not encumber or otherwise deal with the property. Mr Taouk's response to those letters is best set out in the letter from his solicitors of 4 June 2009 as follows: "Your letter has failed to identify any right of your client to lodge a caveat against the Belfield property, other than a reference to a Deed of Guarantee executed by our client. Please provide us with a copy of the Deed of Guarantee and explain the basis on which your client says that it has a caveatable interest in the Belfield property. In relation to points one to three of your letter we do not have any instructions regarding the details of any sale contract, mortgage or charge proposed by Mr Taouk in relation to the Belfield property. We repeat that we only have instructions to act on behalf of Mr Taouk in relation to the caveat." 9 The plaintiff has had difficulty in serving the Statement of Claim in the principal proceedings on Mr Taouk. On 10 April 2009 process servers attempted to effect service of the Statement of Claim on Mr Taouk at the Belfield property. A female occupant advised the process server that she and her family had been residing in the premises for about a year. 10 On 1 June 2009 the plaintiff's solicitors were advised by Express Mercantile that a "skip trace package one search" had failed to provide any information concerning the location of Mr Taouk. It seems that a "skip trace package one search" involves a number of online searches and telephone inquiries. 11 A copy of the Statement of Claim was sent to the solicitors acting on behalf of Mr Taouk in the caveat matter on 27 May 2009. Those solicitors responded by letter dated 2 June 2009 advising that they did not have instructions to accept service of the Statement of Claim. 12 There was other evidence available to the plaintiff, which I accept, to the effect that Mr Taouk is in financial difficulty.

Consideration Caveat AE111568 13 The applicable sections of the Real Property Act 1900 in respect of this question are sections 74F and 74J. They relevantly provide: "74F(1) Any person who, by virtue of any unregistered dealing or by devolution of law or otherwise, claims to be entitled to a legal or equitable estate or interest in land under the provisions of this Act may lodge with the Registrar-General a caveat prohibiting the recording of any dealing affecting the estate or interest to which the person claims to be entitled … (5) A caveat lodged under this section must: (a) be in the approved form,

(b) specify … (v) the prescribed particulars of the legal or equitable estate or interest, or the right arising out of a restrictive covenant, to which the caveator claims to be entitled, …" "74J(1) Where a caveator is served with a notice prepared under ss 74I(1) or (2), 74J(1) or 74JA(3), the caveator may prepare, in the manner prescribed by rules of court, an application to the Supreme Court for an order extending the operation of the caveat. (2) Subject to subs (3), on the hearing of an application made under subs (1), the Supreme Court may, if satisfied that the caveator's claim has or may have substance, make an order extending the operation of the caveat concerned for such period as is specified in the order or until the further order of that court, or may make such other orders as it thinks fit, but, if that Court is not so satisfied, it shall dismiss the application." 14 The plaintiff submits that while there is no reference to the Belfield property in any of the loan documentation, the purpose and intent of that documentation is so clear that there should be implied into it an intention by the parties that any other real estate owned by a guarantor can be relied upon by the plaintiff/lender as security for the loan. The plaintiff relies upon clause 3.1(a) of the Loan Agreement and on clauses 32 and 37 of the Mortgage over the Bondi properties. 15 Clause 3.1(a) provides: "3.1 The Lender is not obliged to make any advance under this Deed unless and until the following conditions are fulfilled to the satisfaction of the Lender: (a) Securities The Lender has received in form and substance satisfactory to it the Securities securing the Secured Monies to the Lender, all duly stamped and in registerable form (where registration is required)." 16 Clauses 32 and 37 of the Mortgage over the Bondi properties provide: "32. The Mortgagor covenants with the Mortgagee that at the cost of the Mortgagor the Mortgagor shall at any time and from time to time at the written request of the Mortgagee execute any instrument including a dealing as defined in the Real Property Act 1900, as amended, which the Mortgagee shall in its absolute discretion require the Mortgagor to execute and do all such other acts, matters and things as the Mortgagee shall consider reasonable for the purpose of preserving or protecting this Mortgage. 37. Guarantee In consideration of the matters mentioned in this Mortgage and/or in consideration of the Mortgagee making advances, granting accommodation or providing financial facilities to, for, or at the request of the Mortgagor and/or the Debtor and at the request of the Guarantor (as testified by the Guarantor's execution of this Mortgage) and pursuant to the Guarantor's agreement so to do the Guarantor hereby covenants and agrees with the Mortgagee to be jointly with the Mortgagor and severally liable to the Mortgagee for the due and punctual observance and performance of the covenants, terms, conditions and provisions in this Mortgage contained or implied and on the part of the Mortgagor to be observed and performed (all such covenants, terms, conditions and provisions being hereinafter referred to as "the Mortgagor's Covenants") …". 17 The question of whether the combined effect of clauses 32 and 37 of a Mortgage create a caveatable interest in another property not the subject of that mortgage was considered by RA Hulme J in Perpetual Nominees v Springfield Retail Pty Ltd [2009] NSWSC 188. His Honour rejected the submission in the following terms: "[37] Assuming for the moment that the obligations of the mortgagor in cl 32 can be regarded as things for which the guarantor can be held liable by cl 37, the words I have emphasised in the former are important. Cl 32 can only be construed, in my view, to provide a power in the mortgagee to require the mortgagor, and in turn the guarantor, to do things "for the purpose of preserving or protecting this Mortgage". This might include matters such as applying for a new certificate of title if the certificate of title for the land the subject of the mortgage might be lost, mislaid or destroyed (s 111 RP Act). I do not regard the clauses as imposing any obligation upon the guarantor beyond things connected with the preservation or protection of the mortgage of the security property. They do not create in the mortgagee any "legal or equitable estate or interest" in any other property that the guarantee might happen to own or have an interest in. If the creation in the mortgage of such an estate or interest was intended there should be found somewhere in the document some clear statement of that intention. Such a statement is not in cls 32 and 37 or anywhere else." 18 With respect I agree completely with his Honour's conclusion. 19 There is nothing in cl 3.1(a) of the Loan Agreement which would alter the conclusion which his Honour arrived at as to the effect of those clauses. It certainly does not operate as a clear statement of intention that there be created an equitable estate or interest in favour of the plaintiff in any other property that the guarantors might own or have an interest in. 20 I am not satisfied that the plaintiff has a caveatable interest in the Belfield property and I decline to extend the operation of the caveat under s 74K of the Real Property Act 1900.

Asset Protection Order 21 The power to grant the relief sought by the plaintiff in relation to the assets of Mr Taouk is set out in r 52.11 of the Uniform Civil Procedure Rules 2005 (UCPR). Rule 25.11 provides as follows: "25.11(1) The Court may make an order (a freezing order), upon or without notice to a respondent for the purpose of preventing the frustration or inhibition of the Court's process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied. (2) A freezing order may be an order restraining a respondent from removing any assets located in or outside Australia or from disposing of, dealing with, or diminishing the value of, those assets." 22 The plaintiff submitted that a freezing order should be made for the following reasons.

1. The plaintiff had a strong case against Mr Taouk and no defence had been filed.

2. There was a real risk that the Court's processes might be frustrated and that a prospective judgment might be wholly or partly unsatisfied by Mr Taouk. 23 In relation to that latter consideration, the plaintiff made the following submissions. It submitted that Mr Taouk had not yet been found for the purposes of service and it could be inferred from his conduct and from his solicitor's refusal to accept service, that he was in fact avoiding service. It submitted that the plaintiff's caveat in respect of the Belfield property had been in place for over 10 months and it was only now that Mr Taouk sought a lapsing order. It submitted that the Court should infer from the service of a lapsing notice in respect of the caveat that Mr Taouk intended to deal with the Belfield property in such a way as to prevent the plaintiff having recourse to it to satisfy Mr Taouk's obligations under his guarantee. 24 The plaintiff submitted that the Court should infer from Mr Taouk's refusal to give the particulars and undertakings in respect of the Belfield property sought from him in correspondence with his solicitors, that he intended to deal with the Belfield property in such a way as to prevent the plaintiff having recourse to it should it be successful in its claim against him. The Court was referred by the plaintiff to other evidence that the plaintiff was in financial difficulty. This financial difficultly, it was submitted, was consistent with Mr Taouk having an intention to deal with the Belfield property. 25 Finally, it was submitted that Mr Taouk's refusal to accept service of the Statement of Claim in the principal proceedings was consistent with a likelihood that if judgment were obtained against him the satisfaction of such a judgment would be frustrated by the disposal of assets such as the Belfield property. 26 On behalf of Mr Taouk it was submitted that no adverse inference should be drawn from the lapsing notice in respect of the caveat. It was submitted that the caveat was bad and should never have been filed. It was open to Mr Taouk at any time to have it removed. It was submitted that there was no evidence that Mr Taouk was avoiding service of the Statement of Claim in the principal proceedings. There had only been one attempt at service. The result of that attempt demonstrated no more than that the Belfield property was occupied by a person other than Mr Taouk. The "skip trace package one search" was no more than a documentary examination which did not allow any adverse inference to be drawn against Mr Taouk. 27 In relation to the Belfield property it was submitted that there was no evidence that the first caveat in favour of IMFML Finance Pty Limited was not still effective and would operate to prevent any dealing with the property. It was submitted that given the defective nature of the caveat, there was no obligation on the part of Mr Taouk to give any undertaking in respect of the Belfield property as a condition of its removal, nor was there any obligation on his part to instruct his solicitors to accept service of the Statement of Claim in the principal proceedings. It was submitted that there was no evidence of any attempt on the part of Mr Taouk to sell or encumber the Belfield property. 28 In summary, it was submitted on behalf of Mr Taouk, that the application for a freezing order was no more than an attempt by the plaintiff to obtain security before judgment, to which it was not otherwise entitled. It was submitted that the real reason for this application was the service by Mr Taouk on the plaintiff of the lapsing notice in respect of the caveat over the Belfield property. 29 In relation to UCPR 25.11 Spigelman CJ said the following in Newcastle City Council v Caverstock Group Pty Limited [2008] NSWCA 249: "[43] The context of rule 25.11 is, as indicated above, in a Part of the Rules concerned with interim preservation. The rule is a formulation of the Mareva injunction jurisprudence which is a comparatively recent development of the common law, based upon the power of a court to prevent the frustration of its process and to ensure that its judgments are not without value. I accept that a narrow or technical approach to such a power is not appropriate." 30 In relation to that jurisprudence, Gleeson CJ said in Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 321-322: "The remedy is discretionary, but it has been held that, in addition to any other considerations that may be relevant in the circumstances of a particular case, as a general rule a plaintiff will need to establish, first, a prima facie cause of action against the defendant, and secondly, a danger that, by reason of the defendant absconding, or of assets being removed out of the jurisdiction or disposed of within the jurisdiction or otherwise dealt with in some fashion, the plaintiff, if he succeeds, will not be able to have his judgment satisfied." 31 As to the first of those considerations, the only conclusion which I can draw is that not only does the plaintiff have a prima facie cause of action against Mr Taouk but in the absence of any defence having been filed, and in the absence of any submissions to the contrary, it has a strong case against him. Nothing to the contrary was submitted on behalf of Mr Taouk. Similarly, there was no evidence that the making of a "freezing order" would entail any risk of detriment to either Mr Taouk or to a third party. 32 The real issue between the parties was whether in the terms of rule 25.11(1) UCPR there was a "danger that a … prospective judgment of the Court would be wholly or partly unsatisfied". Some guidance on the application of the rule are provided by the following statements of principle:

In Vaughan v Duncan [2007] NSWSC 811 Hamilton J said: "[5] The real question in this case is whether there is a sufficient apprehension of dissipation of the cross-defendant's assets in a fashion which would lead to the cross-claimant not being able to have his orders for costs satisfied. The usual first part of the test laid down by Gleeson CJ in Patterson v BTR Engineering (Aust) Limited (1989) 18 NSWLR 319 at 321-322 is irrelevant in this case … The only matter, therefore, that the application for the injunction needs to establish is a sufficient apprehension of dissipation of the assets. [6] One familiar statement of what is necessary to establish this apprehension was made by Mustill J in Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft MBH & Co KG [1984] 1 All ER 398 at 402-3. There his Lordship said: "It is not enough for the plaintiff to assert a risk that the assets will be dissipated. He must demonstrate this be solid evidence. This evidence may take a number of different forms. It may consist of direct evidence that the defendant has previously acted in a way which shows that his probity is not to be relied on. Or the plaintiff may show what type of company the defendant is (where it is incorporated, what are its corporate structure and assets, and so on) so as to raise an inference that the company is not to be relied on. Or, again, the plaintiff may be able to found his case on the fact that inquiries about the characteristics of the defendant have led to a blank wall. Precisely what form the evidence may take will depend on the particulars of the case. But the evidence must always be there. Mere proof that the company is incorporated abroad, accompanied by the allegation that there are no reachable assets in the United Kingdom apart from those which it is sought to enjoin, will not be enough." 33 In Frigo v Culhaci (NSWCA 17 July 1998, unreported) the Court of Appeal said: "A plaintiff must establish, by evidence and not assertion, that there is a real danger that, by reason of the defendant absconding or removing assets out of the jurisdiction or disposing of assets within the jurisdiction, the plaintiff will not be able to have the judgment satisfied if successful in the proceedings. There has been much debate as to the precise degree of risk which must be shown: See generally Patterson . What is clear is that mere assertions that the defendant is likely to put assets beyond the plaintiff's reach will not be enough: Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft MBH & Co KG [1984] 1 All ER 398. The evidence relied upon at the contested hearing fell far short. The admissions in the "without prejudice" correspondence should have been ignored. The sale of an encumbered home unit at a figure above market value does not, standing alone, imply disposal of assets in order to defeat a prospective judgment, even where the purchaser is a close relative. Even if, which is doubtful, the appellant's suspension of work in the building contract could have been regarded as evidence of financial difficulties, it was not argued below that it had such effect. More importantly, that alone is not enough. A Mareva injunction is not designed to stop a person from sliding into insolvency." 34 Of some assistance on the facts of this case is the following observation by Brereton J in Finn v Carelli [2007] NSWSC 261: "[5] It is important to bear in mind that the jurisdiction to make orders of this type was never intended simply to enable a plaintiff or judgment debtor to obtain security for its judgment in advance of execution, but was firmly founded on the jurisdiction of the Court to prevent abuses of its process by preventing a defendant or judgment debtor from embarking on a course of conduct which would have the effect of defeating the Court's jurisdiction. It also needs to be borne in mind that the mere fact that a judgment may not be satisfied for reasons of impecuniosity does not mean that there is an abuse of process. Indeed, it has been pointed out on several occasions that the prospect of impending insolvency is not a reason to grant a Mareva injunction ( Hortico (Australia) Pty Limited v Energy Equipment Co (Aust) Pty Limited (1985) 1 NSWLR 545 at 558)." 35 Applying those statements of principle to this case, it has not been established that Mr Taouk is avoiding service. One attempt at service followed by documentary and telephone inquiries does not establish that proposition. Similarly, in litigation it is not unusual for an opponent to insist on personal service. Whereas that might ultimately have repercussions as to costs, it is not necessarily indicative of an intention to avoid service. 36 Whilst the service of the lapsing notice in respect of the caveat after 10 months of inactivity might be suggestive of an intention on the part of Mr Taouk to deal with the Belfield property, there are other equally plausible explanations. The plaintiff's position on this argument is significantly weakened by the fact that not only is the caveat bad in form, but the plaintiff never had a caveatable interest in the Belfield property and the caveat should not have been lodged. 37 The plaintiff's argument based on the lapsing notice is further weakened by the absence of any evidence relating to what is happening in respect of the earlier caveat lodged by IMFML Finance Pty Limited which would prevent dealings with the Belfield property unless it also lapsed or was removed. 38 As was indicated in the course of argument, there was no obligation on the part of Mr Taouk to provide particulars of his intentions in respect of the Belfield property nor was there any obligation on him to provide undertakings in respect of it. This is particularly so when the request for such particulars and undertakings was made in the context of the lapsing of a caveat which should never have been lodged. 39 The evidence in support of the continuation of the freezing order goes no further than to establish that Mr Taouk is in financial difficulties, that he did not consent to waiving personal service of the originating process and that he wishes the caveat over the Belfield property lodged by the plaintiff to be removed. I am not satisfied that these matters justify the application of rule 25.11 UCPR and the making of a freezing order. Accordingly, I decline to extend the freezing order made by the Registrar on 4 June 2009. 40 The plaintiff has failed on the only issues argued before me. I can see no reason why costs should not follow the event. Accordingly, the orders which I make are as follows:

(1) Apart from orders 1-4 and 7-12 the orders of the Registrar made on 4 June 2009 are discharged.

(2) I dismiss that part of the plaintiff's Notice of Motion which relates to asset preservation orders and the extension of caveat AE111568.

(3) I order the plaintiff to pay Mr Taouk's costs of the hearing before me on 9 June 2009. **********

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