Solicitors: O'Loughlin Westhoff (first and second plaintiffs)
Tomaras Lawyers (second and third defendants)
File Number(s): 2018 / 185865
[2]
Judgment
The Court published its primary judgment in these proceedings on 18 April 2019: Puddick v Dyamond Developments Pty Ltd [2019] NSWSC 431.
The Court published a second judgment in this matter on 19 June 2019: Puddick v Dyamond Developments Pty Ltd (No 2) [2019] NSWSC 738.
On 18 April 2019, when the first judgment was delivered, the Court stated that it would hear the parties on the terms of any appropriate orders to give effect to the reasons for judgment, and to make provision for the further conduct of the proceedings.
In part, that announcement was made because of the proposal by the plaintiffs to pursue a tracing remedy against the third defendant.
On 24 May 2019, the Court ordered that judgment be entered in favour of each plaintiff against the first and second defendants in the amount of $104,909.
The Court also made orders that freezing orders made by Pembroke J on 15 June 2018 against the first defendant, and by Slattery J on 17 December 2018 against the second and third defendants, be extended until the two judgment debts were satisfied in full.
On 13 June 2019, the Court stood the proceedings over until 11 July 2019 before the Registrar, for the purpose of making case management orders relating to the tracing of funds paid by the plaintiffs to the first defendant.
Further, on 19 June 2019, the Court made the following orders:
1. Declares that the transfer by the first defendant to the third defendant of 19,500,000 shares in Pacifico Minerals Ltd was for no consideration.
2. Order the defendants to pay the plaintiffs' costs of the proceedings on the ordinary basis.
The Court made orders on 17 September 2019 for the purpose of assisting in the tracing exercise that the plaintiffs wished to undertake. The Court made an order that the second defendant swear an affidavit about the current whereabouts and destination of the amounts of $100,000 paid by each of the plaintiffs to the first defendant. It also ordered that the second defendant's wife, as the director of the third defendant, provide an affidavit as to the current assets and liabilities of that company.
On 29 November 2019, the Court of Appeal heard an appeal against the orders made by the Court in these proceedings at first instance, and, on 6 March 2020, it dismissed the appeal: Dyamond Developments Pty Ltd v Puddick: [2020] NSWCA 32.
The plaintiffs sought to enforce the judgments in their favour by the first plaintiff commencing winding up proceedings against the first defendant in the Corporations List of this Court on 21 August 2019.
They also issued bankruptcy notices to the second defendant and commenced bankruptcy proceedings against him in the Federal Circuit Court of Australia.
On 23 September 2019, Black J, sitting as the Corporations List Judge, made case management orders for the service of evidence and submissions by the parties to the winding up proceedings, for the purpose of a hearing taking place on 21 October 2019.
His Honour also made another order that commenced as follows:
5. If the Defendant pays funds in the sum of $209,818 into Court by Friday, 27 September 2019… then orders 1 to 4 will be vacated by further order of the Court and the Court will make further orders in chambers…
Order 5 then provided for a different and more extended timetable than had been fixed by orders 1 to 4.
Order 5 contemplated that the hearing would take place on 9 December 2019, or if that was not practicable, in the last week of Court term ending on 20 December 2019.
The first defendant in these proceedings caused the $209,818 to be paid into Court on 26 September 2019.
In due course, on 11 December 2019, Emmett AJA ordered that the first defendant be wound up. Mr Sule Arnautovic of Jirsch Sutherland was appointed as liquidator of the first defendant.
Since that time, the solicitor who previously acted for all three defendants in these proceedings has only acted for the second and the third defendants.
In their written submissions to the Court on the present application, the plaintiffs advised that the $209,818 remains with the Court, and the plaintiffs and the liquidator are currently engaged in discussions with a view to having those funds paid out to the plaintiffs.
The purpose of the present reasons for judgment is to decide what orders should be made to finally determine the present proceedings.
On 2 April 2020, the plaintiffs provided written submissions by Dr Peden SC, proposed together with two versions of short minutes of order.
Version A of the draft short minutes of order provided by the plaintiffs is in the following terms:
The Court makes the following orders:
1. The balance of these proceedings (being the plaintiffs' claim for tracing against the third defendant) be discontinued.
2. The freezing orders against the first defendant made by Pembroke J on 15 June 2018 be discharged.
3. The freezing orders against the third defendant made by Slattery J on 17 December 2018 be discharged.
4. The Court notes that the plaintiffs are entitled to the costs of the balance of these proceedings under order 2 made on 19 June 2019.
Version B of the draft short minutes of order is in the same terms as the other version, except for order 4, which provides:
4. The defendants are to pay the plaintiffs' costs of these proceedings on the ordinary basis.
It will be convenient to explain the reasons for the two versions of order 4, after I set out the draft short minutes of order contended for by the second and third defendants. Those draft minutes of order were provided to the Court, together with written submissions by Mr JT Johnson of counsel dated 2 April 2020, and an affidavit of the solicitor for the second and third defendants made on 6 April 2020.
The second and third defendants' draft short minutes of order provide:
The Court makes the following orders:
1. That the monies paid into Court in the sum of $203,818 [in fact $209,818] by the first defendant pursuant to orders made by Darke J [in fact Black J] on 23 September 2019 be released to the third defendant as the purpose for which the monies were provided to the first defendant by the third defendant has not been satisfied giving rise to a quistclose trust in favour of the third defendant.
2. The freezing orders against the second defendant be discharged.
3. The plaintiffs pay the second and third defendants' costs of the proceedings from 19 June 2019 on an ordinary basis.
4. The proceedings be dismissed.
I will deal first with the dispute between the parties concerning the costs order that should be made.
First, I should explain, that, in their written submissions, the plaintiffs advised that they expect to receive the amount paid into Court by the first defendant, with the agreement of its liquidator, in payment of the judgments entered by the Court on 24 May 2019 against the first and second defendants.
To the extent that leaves any balance owing to the plaintiffs, they hope to recover that balance by means of the bankruptcy proceedings that are being pursued against the second defendant.
Consequently, as the pursuit by the plaintiffs of a tracing remedy, which may primarily be directed against the third defendant, may be costly and ultimately prove to be unnecessary, the plaintiffs are content for their present proceedings to be discontinued. If the Court simply makes an order for discontinuance, and the plaintiffs' hopes of recovering the balance of the amounts owed to them by means of the bankruptcy proceedings against the second defendant prove to be unfounded, then the plaintiffs will not be precluded from bringing a separate claim for tracing against the third defendant: Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r 12.3(1).
The plaintiffs therefore have not abandoned their claim for an entitlement to pursue a tracing remedy against the third defendant. They merely recognise that taking that course is not likely to be the most cost-effective means of recovering the judgments made in their favour, as matters appear to stand at this time.
The plaintiffs submit that version A of order 4 is the preferable order because it makes clear that order 2 made on 19 June 2019, whereby all three defendants were ordered to pay the plaintiffs' costs of the proceedings on the ordinary basis, applied to all defendants and related to the whole of the proceedings.
If the Court does not agree that order 2 was intended to operate on the costs of the proceedings prospectively, then the Court should make version B of order 4, which would operate retrospectively from the date the order is made, and require the defendants to pay the plaintiffs' costs of these proceedings on the ordinary basis to the date the orders are made in accordance with these reasons for judgment.
I am satisfied that version B of order 4 should be made. Ordinarily, where, as occurred on 13 June 2019, the Court makes an order that one party pay the other party's costs of the proceedings in respect of proceedings that have not been completed, that does not necessarily oblige the first party to pay the total costs of the proceedings, whatever may happen in respect of their determination after the date that the order is made. At the very least, there would be uncertainty that an order made in the terms of order 2 on 13 June 2019 had that effect.
I am satisfied that an order should now be made that makes clear that all of the defendants are liable to pay the plaintiffs' costs on the ordinary basis from 13 June 2019 to date. That conclusion is not affected by the fact that it now appears that the plaintiffs may be able to recover the amounts of the judgments made in their favour from the first and second defendants, without the need to pursue a tracing remedy against the third defendant. The change in direction by the plaintiffs followed the payment of the money into Court by the first defendant on 26 September 2019, and the Court has only made one procedural order in these proceedings after that date, which was made on 18 October 2019.
I dealt with the plaintiffs' claim against the third defendant at [104] to [110] of the primary judgment in these proceedings. At [108], I found that one of the plaintiffs had succeeded in proving that the first defendant had transferred 19,500,000 shares to the third defendant without any consideration. As stated at [109], that was a finding that was likely to be material to any tracing remedy pursued by the plaintiffs against the third defendant.
I am satisfied that the limited steps taken by the plaintiffs in these proceedings after the making of the earlier substantive orders, do not justify the Court making an order that deprives the plaintiffs of their costs of these proceedings.
The decision of Stewart J in Elevate Brandpartners Ltd v Hammond (No 4) [2020] FCA 421, relied upon by the second and third defendants to support a contrary position, does not require that the Court order the plaintiffs to pay the costs of the second and third defendants from the date of the first costs order. I accept that ordinarily, if a party is given contested leave to discontinue proceedings, the party should be ordered to pay the other party's costs of the proceedings. However, in the present case there has been a hearing on the merits, and the plaintiffs succeeded on all issues that were contested. Unlike Elevate Brandpartners Ltd v Hammond (No 4), where the applicants accepted undertakings in lieu of injunctive relief, and applied to discontinue the proceedings in so far as the proceedings sought additional declaratory relief, it has always been reasonably clear, in the present proceedings, that the pursuit of a tracing remedy by the plaintiffs would only be necessary if they were unable to enforce their judgments against the first and second defendants more effectively. As discussed by Stewart J at [26], if the plaintiffs are successful in obtaining payment of the judgment sums by less expensive means, the further pursuit of a tracing remedy would be futile.
I am also satisfied that it is appropriate to make order 1 as sought by the plaintiffs, to the effect that the balance of these proceedings be discontinued, rather than order 4 sought by the second and third defendants, which would have the effect that the proceedings would be dismissed. The Court should not make any order that may have the effect of depriving the plaintiffs of the possibility of reviving their claim for a tracing remedy, should that become necessary.
The third defendant's claim, by means of order 1 of the draft short minutes of order propounded by the second and third defendants, that the monies paid into Court in the sum of $209,818 be released to the third defendant, is based upon the principle in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567.
In its written submissions, the third defendant submitted that the money was paid into court by the third defendant. The third defendant submits that the payment was made for the express purpose of the release and satisfaction of the judgment debts owed by the first and second defendants to the plaintiffs.
The third defendant submitted that, as the first defendant has been wound up, it is no longer possible for the money paid into court to be applied in satisfaction of the two judgment debts. The claim of the plaintiffs against the first defendant has been converted into one entitling them to lodge proofs of debt in the winding up and to participate as ordinary unsecured creditors.
Accordingly, the third defendant submits, the purpose for it paying the money into court has failed, so the money in court is held on a resulting trust for the third defendant.
The Court cannot, in these proceedings, make the order sought by the third defendant on the present application.
The money was paid into court in the winding up proceedings, and any order for its payment out of court should be made in those proceedings. New proceedings should not be necessary, and the order sought by the third defendant could be made in the winding up proceedings, if that relief were sought by notice of motion in those proceedings.
As the money was paid into court on the behalf of the first defendant, the first defendant has an interest in the making of the order sought by the third defendant. The notice of motion would have to be served on the liquidator of the first defendant, so that he would have an opportunity to contest the making of the order. Naturally, the notice of motion would also have to be served on the plaintiff in the winding up proceedings.
There is ambiguity as to the circumstances in which the money was paid into court.
In its written submissions, the third defendant asserts that the money was paid by the third defendant. However, order 1 of the short minutes of order proposed by the second and third defendants describes the payment as having been made by the first defendant.
Although I have not reviewed the Court's file in the winding up proceedings, and am not privy to any communications between the parties to those proceedings concerning the basis upon which the money was paid into court, it appears likely from the terms of the orders made by Black J on 23 September 2019, that, at least in part, the purpose for which the money was paid into court was to secure a more extended timetable, in order to improve the prospects of the first defendant in defending the winding up application. To that extent, the purpose for which the money was paid into court did not fail. It ultimately did not avail the first defendant, as the winding up order was made, but that is not the point.
Although order 5 made by Black J on 23 September 2019 proposed a contingent timetable, provided the first defendant paid the money into court, the order itself did not specify the basis upon which the money would be paid into court, in the sense of which parties were intended to have a claim against the money, and on what basis.
It is at least probable that the intention of the parties was, whether express or implied, that the money was paid into court by the first defendant to provide security to both the plaintiffs in respect of the execution of the judgments made in their favour.
However, these are matters that cannot be decided now, on the basis of the evidence and submissions that have been provided to the Court. The submissions that have been made by the third defendant may need to be considered by the liquidator of the first defendant.
It remains for me to make a number of observations about the evidence relied upon by the third defendant in support of its application.
First, the solicitor said in par 11 of his affidavit that the first defendant caused the money to be paid into court.
The solicitor asserted that the money was obtained by the first defendant as a loan from the third defendant "for the express purpose of the First Defendant obtaining an extension of time to file evidence as to solvency and evidence of its ability to access funds to satisfy its indebtedness to the Plaintiffs".
If that is true, it is the first defendant that would have the right to apply for the money in court to be paid out to it. The third defendant would be an unsecured creditor of the first defendant.
The solicitor said in par 16 that, as between the third defendant and the first defendant, there was a "mutual intention that it should not form part of the First Defendant's assets". But when a loan is paid to a party, the money becomes an asset of the debtor.
The solicitor acknowledged in par 17 that the purpose of the payment was the granting of an extension of time for the filing of evidence of solvency, which is a purpose different from the one asserted in the third defendant's written submissions.
In the same paragraph, the solicitor asserted that, as the purpose was satisfied, the loan must be repaid to the third defendant in accordance with the Quistclose principle. The Quistclose principle applies when the purpose fails, not when it is satisfied.
The solicitor's affidavit annexed affidavits of the second defendant in the winding up proceedings.
In the second defendant's 21 September 2019 affidavit, he said in par 3(a) that the first defendant had available funds of $210,000 which it will be able to hold for the purpose of paying the two judgment debts.
For the foregoing reasons, the Court will make the following orders:
The Court orders:
1. The balance of these proceedings (being the plaintiffs' claim for tracing against the third defendant) be discontinued.
2. The freezing orders against the first defendant made by Pembroke J on 15 June 2018 be discharged.
3. The freezing orders against the third defendant made by Slattery J on 17 December 2018 be discharged.
4. The defendants are to pay the plaintiffs' costs of these proceedings on the ordinary basis.
[3]
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Decision last updated: 12 May 2020