Rabah Enterprises Pty Ltd v LCM Operations Pty Ltd

Court of Appeal (NSW)|2023-08-28|Before: Rees J

BACKGROUND

In July 2010, two brothers, Nouredeen and Youssef Abdul-Rahman, incorporated Rabah. The following month Rabah purchased a property at 316 Parramatta Road, Burwood for $2.51 million. A year later a development application was lodged to construct residential apartments; consent was granted in June 2012. In October 2012, Rabah obtained development finance in an amount of a little over $10.5 million from the ANZ Banking Group.
On 12 February 2014, 316 Group Pty Ltd (316 Group) was incorporated with both Nouredeen and Youssef Abdul-Rahman as directors and shareholders. Later control of 316 Group passed to Youssef Abdul-Rahman. In May 2014 a building contract was executed and management of the project appears to have been undertaken by 316 Group. Over the ensuing months, payments were made to 316 Group accounts by a variety of companies associated with the Abdul-Rahman family (including brothers of Nouredeen and Youssef) and by drawdowns on the bank facility. Those funds were used to pay for the development.
The building development was successful, and the project was 90% complete by August 2015. However, it was due to have reached practical completion by 30 June 2015. Practical completion was in fact reached and an interim occupation certificate issued in December 2015.
Mr Youssef Abdul-Rahman estimated that by the end of the project Rabah had provided about $12.5 million in loans to 316 Group. Calculating interest of 8% on that figure gave a figure of $14.85 million.
Curiously, 316 Group's ledger for the 2016 financial year recorded a sale to Rabah entered on 30 March 2016 which, with GST, totalled $14.8 million. The basis of the claim was that 316 Group had charged Rabah a fee of $14.8 million for the construction project. Rabah did not pay the amount, but asserted at trial that the claim was offset by the loan repayment liability of 316 Group to Rabah. One result of raising the debt was that 316 Group had a GST liability according to its March business activity statement (BAS) in an amount of $1.28 million. Thus, while rendering an invoice (if in fact it was ever rendered) in that amount may have been intended to extinguish the debt on 316 Group's loan accounts, there remained the question of the payment of GST. In February 2017, not having received payment, the ATO issued a statutory demand to 316 Group for an amount of some $1.34 million. In April 2017, the ATO commenced proceedings in the Federal Court to wind up 316 Group.

Judgment and subsequent events

By a judgment delivered on 2 June 2023, Rees J made orders in favour of LCM: LCM Operations Pty Ltd v Rabah Enterprises Pty Ltd [2023] NSWSC 590. Order 1 gave judgment for LCM in the sum of $14.8 million together with interest to be calculated. Order 2 otherwise dismissed the amended summons, and order 3 required that Rabah pay LCM's costs of the proceedings. On 28 June 2023, the trial judge varied order 1 to provide for judgment in favour of LCM in the sum of $20.22 million. (The increase was the result of adding interest to the capital sum the subject of the original order.) On 28 July 2023, order 3 was varied to provide for costs to be assessed on an indemnity basis on and from 7 April 2021.
Various steps, relevant to the present stay application, have been taken by the parties since the entry of those orders. First, on 23 June 2023, that is, the day after the orders were entered, LCM obtained a writ authorising the Sheriff to levy on the property of Rabah (being the 18 units in the strata plan) an amount to cover the then judgment debt (prior to amendment). On 20 July 2023, LCM gave notice that the writ had been registered on the title to the primary property (Lot 6). On 2 August 2023, separate notices were given with respect to the registration of the writ on the other strata titles.
Secondly, on 30 June 2023, LCM obtained freezing orders which prevented Rabah from disposing of, dealing with, or diminishing the value of its assets, being 18 lots in the strata plan of the development which Rabah had not sold. Those orders were made ex parte, but at a hearing on 4 July 2023 they were replaced, by consent, with an undertaking in the following terms: "Upon the plaintiff by its counsel giving the usual undertaking as to damages, on a without prejudice basis, [Rabah] undertakes to the Court, until further order of the Court, to notify [LCM] by written notice to [LCM's] solicitor at least 21 days prior to in any way selling, disposing, transferring, dealing with, diminishing the value of, or encumbering any interest it has in respect of [the 18 strata lots] other than in the ordinary and proper course of business."

Stay application

Two matters were not in dispute. The first was that, if able to recover the amount of the judgment debt, LCM would be in a position to repay any amount by which the judgment was reduced or reversed on appeal, it having cash at hand in excess of $30 million. Rabah did not contest that proposition.
Secondly, LCM conceded that the appeal was not unarguable; however, in its written submissions, LCM stated that the "prospects of appeal are very poor". Unsurprisingly, Rabah submitted that the merits should be assessed at a somewhat higher level than "not unarguable". For reasons which will be noted shortly, Rabah's submission should be accepted.
The dispute concentrated on the balance of convenience.
The power to order a stay with respect to a decision under appeal is identified in the Uniform Civil Procedure Rules 2005 (NSW), r 51.44. This rule, however, provides no more guidance as to the basis upon which enforcement may be stayed than does s 135(2)(c) of the Civil Procedure Act 2005 (NSW) conferring power on the court to make orders in respect of enforcement of a judgment. Nevertheless, the relevant principles are well-established.
The principles were restated by this Court in Kalifair Pty Ltd v Digi-Tech (Australia) Limited (2002) 55 NSWLR 737; [2002] NSWCA 383 (Handley, Sheller and Ipp JJA) in the following terms: "28 A successful party is prima facie entitled to the fruits of his judgment. He 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. The Court will endeavour to see that a stay does not cause that kind of prejudice to a judgment creditor. An appellant may be required to provide appropriate security as the price of a stay which may make the judgment creditor a secured creditor. Otherwise 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."
The Court should be wary of reading statements of principle as imposing preconditions or a rigid structure on the way in which a stay application should be considered. More recently, in Port Macquarie Hastings Council v Diveva Pty Ltd t/as Mid Coast Road Services [2017] NSWCA 4 at [29] Payne JA stated in non-prescriptive terms the range of issues which are generally taken into account. Some will have greater weight in some circumstances than others.
One factor of which the court will generally be mindful is that the appeal may be frustrated if steps taken to enforce a judgment result in the appellant being under external administration prior to the hearing of the appeal. While that is unlikely to occur in the present case, for reasons to be noted shortly, LCM volunteered that it would not take steps to that end. Rabah, however, raised a concern that any step taken to enforce the judgment would involve sale of the strata lots, which in turn would trigger default provisions under the financial facility provided to Rabah by the National Australia Bank. If the bank sought to call in its mortgage, the result would be a forced sale of all the properties with the possibility of a shortfall leading to steps being taken to wind the company up, not necessarily brought by LCM. LCM responded that the freezing orders had already triggered a default under the facility, but the bank had not acted upon them.

Determination

For the following reasons, it is appropriate to make orders maintaining the status quo in the present case.
First, both parties sought an early hearing of the appeal. Indeed, Rabah's notice of motion sought expedition. Subject to the parties working out a timetable for the exchange of submissions and the preparation of appeal books, the Court is able to expedite the hearing of a one-day appeal (the current estimate). For example, the matter could, on current listings, be heard in the final week of September, if the parties were ready by that time.
In considering what is likely to happen by way of execution of the judgment below, absent a stay, a further period should be taken into account to allow for the determination of the appeal. Given that the trial judge delivered judgment within three months of the hearing of the trial (and within two months of the completion of submissions) it may be anticipated that there are good prospects of the appeal being heard and determined this year.
Secondly, it is unlikely that a levy on property, which would involve the sale of the 18 strata units in the development presently owned by Rabah, would be completed in that time. However, absent a stay, it must be assumed that LCM or the sheriff would take steps to obtain vacant possession and sell the properties. All the properties are presently tenanted and some, if not all, are subject to caveats lodged by other entities associated with the Abdul-Rahman family, including those who appear to have made loans to the company to provide funds for the development. Further, the Court was informed that final occupation certificates have not been issued for all the units, the present state of occupation being permitted under interim occupation certificates.
Thirdly, while these circumstances might not be persuasive in favour of a stay if, as LCM submitted, the appeal has "very poor" prospects, on a superficial assessment, the prospects are at least reasonably arguable.
While the services provided by Rabah to 316 Group and valued in the BAS for March 2016 at $14.8 million are obscure, it may be assumed that a debt in this amount was payable by Rabah to 316 Group. On the trial judge's acceptance that the statement in the BAS was to be taken at face value, the question is whether it remains an outstanding liability of Rabah. In two passages in the judgment, setting out Rabah's defence, the judge stated: "90 It is convenient here to set out the defendant's version of events. In short, the defendant maintained that 316 Group was established to give Youssef work experience, so that he could get his builder's licence. Rabah undertook the development with the builder. 316 Group did very little beyond paying invoices, with funds provided by Rabah and loans made by third parties to Rabah at Nouredeen's direction. On completion of the development, 316 Group was to pay Rabah the amount outlaid for the construction plus 8% interest per annum. … 102 Youssef said he prepared an estimate. He estimated that Rabah had provided about $12.5 million in loans. Youssef added 8% to that figure for interest and then a further 10% for GST. This gave him a figure of $14.85 million, which he rounded down to $14.8 million on the basis that they could lodge any amendments with the ATO once Mr Hassan had worked out the proper figures. … Nor was he concerned as whatever the precise figure was, as there would be a setoff between the companies and a neutral result. Youssef instructed Mr Hassan that he wanted 316 Group to charge a fee of $14.8 million to Rabah. Youssef told Mr Hassan that he needed to make the necessary entries to the records of both Rabah and 316 Group so that the companies were in a neutral position in regards to the funds loaned and the fee charged. Youssef never sent an invoice to Rabah for $14.8 million or any other sum."
On that understanding, the claim by 316 Group for $14.8 million for services provided to Rabah was a mechanism for settling its obligation to repay loans which totalled some $12.5 million (on Youssef Abdul-Rahman's estimate), which, with interest at 8%, provided a total liability of approximately $14.85 million. However, whether that was so or not, Rabah's case was that its liability should be reduced by the payments made by way of loans to 316 Group. On that calculation, the judgment debt would either be extinguished or reduced to a sum variously assessed by the parties at about $500,000. (There was a claim by LCM that, on a quantum meruit basis, there was an amount of some $665,000 payable by Rabah, whereas, at one point, Rabah was prepared to concede an amount of some $443,000, although it later withdrew from that position.)
Ultimately it seems that the appeal is likely to turn on whether the trial judge was correct in not permitting a balancing of payments to and from 316 Group but simply adopting the statement in the BAS that, in effect, $14.8 million was payable by Rabah to LCM. As Rabah expressed the position in its written submissions on the stay: "9 In fact, 316 Group incurred no construction or project costs that were not funded from Rabah or its nominees or associates. No finding exists that [316 Group] did make such contributions to the value of the actual cost of the construction. The primary judge erroneously failed to give any credit to [Rabah] for the receipt by [316 Group] of the many millions of dollars which were then used to fund the costs of construction." Whether or not that contention prevails, it is at least reasonably arguable.
Fourthly, there is a significant risk that if LCM were to take steps to obtain possession and sell the properties, NAB would seek to recover the outstanding loan of $6 million under the finance facility operated by Rabah. The fact that it has not taken those steps yet provides little comfort that such steps will not be taken once a creditor presses ahead with plans to sell the properties which secure the NAB loan.

Nature of orders

If there is to be a stay, the value of Rabah's assets should be protected so that any delay which leaves the present judgment on foot will not unduly prejudice LCM. As noted above, LCM sought to protect its position, following the delivery of judgment, first by obtaining freezing orders and then by accepting an undertaking from Rabah in place of a continuation of the freezing orders.
On one view, LCM is protected by the existing undertaking given by Rabah, with LCM's consent, in place of the freezing orders which LCM had obtained. The undertaking remains in force. LCM did not submit that there had been any breach of the undertaking (or contravention of the freezing orders) but noted that on 28 June 2023 Rabah had taken out a $6 million loan secured on the properties with NAB and had expended $1.4 million on purchasing gold bullion and a further $1.24 million, paid out on or about 3 August 2023, to a number of entities which it claimed were creditors, but for services or goods which were not disclosed.
The current director and secretary of Rabah, Mr Adam Poulous, gave evidence that he had taken steps to diversify the activities of Rabah beyond land development. As a result, on LCM's case, the undertaking which permitted Rabah to deal with or encumber its interests in the 18 strata plan lots "in the ordinary and proper course of business" allowed Rabah to reduce its equity in the properties and transfer the value to other assets or activities which were not subject to the undertaking.
There is no evidence before the Court as to the value of any of the assets held by Rabah, including the strata plan lots. Nor is there any evidence that Rabah has attempted to dissipate its assets. It appears that the development was largely funded by a loan from the ANZ Bank which has been repaid. Accordingly, the units are security only for the $6 million loan facility with NAB, which appears to have been largely drawn down.
In these circumstances, the balance of convenience favours a stay until 28 days after the determination of the appeal, subject to an order that protects the totality of Rabah's current interests in the Burwood properties. That is, there should be no power to diminish their value or encumber them further. To the extent that there are expenses incurred on an ongoing basis in the management and maintenance of the properties, there is no reason to believe that those expenses cannot be met from the rental payments by the tenants of those properties.
At the hearing of the motion, counsel for Rabah handed up a proposed undertaking in similar terms to the undertaking accepted in the Equity Division on 4 July 2023. That undertaking was not acceptable to LCM, but it contained two further elements which should be accepted. First, it agreed to pay into Court, on or before 4 September 2023, the sum of $495,000. Secondly, it included an undertaking not to sell, dispose of, transfer, deal with, diminish the value of or encumber, its interest in: "Any precious metals it has acquired from the drawdown of the loan facility the subject of the facility agreement dated 28 June 2023 … without giving the respondent at least [one day's] notice and provided that the appellant must deposit all proceeds from the sale of the precious metals into its NAB bank account and must not dispose, transfer, deal with, diminish the value of or encumber those sales proceeds other than in the ordinary and proper course of business."
The provision for only one day's notice suggests that Rabah seeks to maintain its ability to invest and trade in precious metals. The apparent protection given by the undertaking in respect of that matter is substantially reduced, if not rendered worthless, by the carveout for the proper and ordinary course of business. The purpose of giving any notice of a sale or transfer is obscure and, in any event, does not extend to dealings with the proceeds of sales. The condition of a stay should be in terms which will provide reasonable protection from reduction in value of the additional funds obtained through the increase in the NAB facility obtained subsequent to the judgment.
Any difficulties in giving effect to the orders can be brought back by exercise of liberty to apply. The parties should take steps forthwith to agree a procedural timetable and obtain from the Registrar an early hearing date for the appeal.

Orders

The Court makes the following orders: 1. Until the 28th day after the entry of orders disposing of the appeal, stay: 1. order 1 made by Rees J on 2 June 2023 as varied on 28 June 2023; 2. order 3 made by Rees J (with respect to the costs of the trial) on 2 June 2023 as varied on 28 July 2023; and 3. the writ for the levy of property issued on 22 June 2023. 1. Order 1 will remain in operation subject to compliance by the appellant with the following conditions: 1. the appellant shall not sell, dispose of, transfer, deal with, diminish the value of, or encumber any interest it has in lots 6, 13-14 and 37-51 of Strata Plan 93010; 2. the appellant shall not sell, dispose of, transfer, deal with, diminish the value of, or encumber any interest it has in any jewellery, watches and diamonds (valuables) acquired from the drawdown of the loan facility, the subject of the facility agreement with the National Australia Bank dated 28 June 2023, save that the appellant may sell or dispose of the valuables and pay the proceeds of sale into its NAB bank account, and funds in that account may not be transferred or expended during the period of the stay except to pay legal fees incurred in relation to the appeal or to pay into Court the sum identified in (c) below; 3. the appellant shall no later than close of business on Wednesday, 6 September 2023, pay into Court the sum of $495,000; and 4. the appellant is to comply with any direction given by a judge or the Registrar for the expeditious hearing and disposal of the appeal. 1. The costs of the motion shall be costs in the appeal. 2. Grant the parties liberty to apply to a judge of the Court on 48 hours' notice. 3. Otherwise dismiss the appellant's notice of motion filed on 21 August 2023.

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: 30 August 2023

Solicitors: Bartier Perry (Appellant) Stacks Law Firm (Respondent) File Number(s): 2023/203814 Decision under appeal Court or tribunal: Supreme Court Jurisdiction: Equity - Commercial List Citation: [2023] NSWSC 590 Date of Decision: 2 June 2023 Before: Rees J File Number(s): 2020/262271

At a glance

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Judgment (7 paragraphs)

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Legislation Cited (2)

Cases Cited (4)

Cited By (2)