Syndicate Mortgage Solutions Pty Ltd v Khaled El-Sayed & ors

Supreme Court of NSW|2010-03-18|Before: Brereton J

CITATION : Syndicate Mortgage Solutions Pty Ltd v Khaled El-Sayed & ors [2010] NSWSC 348

HEARING DATE(S) : 18 March 2010 JURISDICTION : Equity Division

DECISION : Grant leave to first, third and fifth cross-defendants to be heard on the present application. Grant leave to the first and second cross-claimants to bring a cross-claim in the name and on behalf of K & K Elsayed Pty Limited as third cross-claimant.

(CTH) Corporations Act 2001 s 237 LEGISLATION CITED : (NSW) Contracts Review Act 1980 Supreme Court Corporations Rules r 213

Cape Breton Company v Fenn (1881) 17 Ch Division 198 Carpenter v Pioneer Park Pty Limited (2008) 66 ACSR 564 Chahwan v Euphoric Pty Ltd [2006] NSWSC 1002 Chahwan v Euphoric Pty Ltd (2008) ACSR 611 CASES CITED : Chahwan v Euphoric Pty Ltd [2009] NSWSC 805 Ragless v IPA Holdings Pty Limited (2008) 65 ACSR 700 Re Bank of Gibraltar v Malta (1865) LR 1 Ch App 69 Re Imperial Bank of China, India and Japan (1866) LR 1 Ch App 339 Vouris as Liquidator of Cadimas Express Pty Limited v Deputy Commissioner of Taxation (1999) 33 ACSR 527

Syndicate Mortgage Solutions Pty Ltd (plaintiff/first cross-defendant) Khaled El-Sayed (first defendant/first cross-claimant) Khayrieh El-Sayed (second defendant/second cross-claimant) K & K El-Sayed Pty Ltd (third cross-claimant) PARTIES : National Australia Bank Limited (third defendant) Perpetual Trustees Victoria Limited (fourth defendant) Haysam Mouhajar (second cross-defendant) Raymond Mawad (third cross-defendant) Registrar General of NSW (fourth cross-defendant) Ozem Azzam Kassem (fifth cross-defendant)

Mr Tayyar (sol) (plaintiff/first & fifth cross-defendants) COUNSEL : Mr McKeand SC w Mr Stenhouse(cross-claimants) Mr Curtin (third cross-defendant)

Burkett & Taylor (plaintiff/first & fifth cross-defendants) Simon Diab & Associates (first & second defendants/cross-claimants) SOLICITORS : Simmons & McCartney (second cross-defendant) Colin Biggers & Paisley (third cross-defendant) Legal Services, Dept of Lands (fourth cross-defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2008/278455 Syndicate Mortgage Solutions Pty Limited v Khaled El-Sayed & Ors JUDGMENT (ex tempore) 1 HIS HONOUR: In the substantive proceedings the plaintiff Syndicate Mortgage Solutions sues the First Defendant Khaled El-Sayed, the Second Defendant Khayrieh El-Sayed, the Third Defendant National Australia Bank, and the Fourth Defendant Perpetual Trustees, essentially for moneys in the order of a million dollars or so said to be due by the El-Sayeds to Syndicate Mortgage Solutions under loan agreements made between them and secured on property of the El-Sayeds and on property of a company in which they are the shareholders, K & K Elsayed Pty Limited, which is now in liquidation and in respect of which strike off action is pending. In addition to claiming the debt, Syndicate Mortgage Solutions claims possession of the land securing the debt, and alternative orders for the appointment of trustees for sale of the relevant properties.

2 By their first cross-claim as amended, Mr and Mrs El-Sayed, and at least purportedly K & K Elsayed Pty Limited, claim orders on various bases - including non est factum, fraud, (NSW) Contracts Review Act 1980, and misleading and deceptive conduct - which would have the effect of avoiding the securities, and, in addition, damages - against the lenders and the receivers appointed by them for trespass in connection with the receivership, and against a solicitor who acted at the time at which the transactions took place, the Third Cross-Defendant, Raymond Mawad, for negligence in connection with advice said to have been given or not given to the El-Sayeds at that time. 3 Presently before the Court is an application by Mr and Mrs El-Sayed for leave to institute and prosecute the cross-claim in the name and on behalf of K & K Elsayed Pty Limited. That application is brought in circumstances where I expect that the evidence will establish that the liquidator is not inclined to take any action. The immediate question for determination arises from an objection, taken by senior counsel for the El-Sayeds to the appearance of counsel for the solicitor Mr Mawad, or the solicitor for the lenders and the receivers, appearing on the present application. 4 Although brought in the inherent jurisdiction of the court, the present application is akin to one under the (CTH) Corporations Act 2001, s 237. In Chahwan v Euphoric Pty Ltd [2006] NSWSC 1002, Barrett J was confronted with a similar objection. To summarise what his Honour said; in ordinary circumstances, the persons properly interested in an application such as the present one are the normal decision-makers of the corporation, typically (in addition to the applicant) those who are within the categories qualified to apply for leave under s 237, and apparently not the prospective defendant in the substantive proceedings. However, this is not a hard and fast rule, and from time to time prospective defendants have been heard in opposition to s 237 applications. That has more commonly been so when the proceedings were already advanced when the need for leave was recognised, or because of other factors affecting the constitution of the proceedings. It would go too far to say that the prospective substantive defendant should never be heard on a s 237 application. As his Honour said (at 14): Cases in which there is an established litigious context engendering a legitimate expectation on the part of the substantive Defendant of an opportunity to argue the question of the grant of s 237 leave are distinguishable from those where a person withstanding under s 236 makes an application in advance of initiation of any proceedings by the company or before the company has become involved in the defence of proceedings initiated against it.

5 In Chahwan, the company was an established party before the s 237 application was foreshadowed, and the applicant had indicated willingness for the prospective defendant to be heard on the s 237 application. Barrett J made an order nunc pro tunc, to the effect that if Euphoric needed leave under Supreme Court Corporations Rules r 2.13 to be heard on the s 237 application, it would have that leave. 6 In the present case, the situation is not so far advanced as it was in Chahwan. Nonetheless, there is an established litigious context. The statement of cross-claim has already been filed and amended at least twice. The company is named as a cross-claimant. It was an integral party in the transactions presently sought to be set aside, and for that reason would probably be a necessary party as a cross-defendant, if it were not a cross-claimant. Although it is quite correct that the present application was foreshadowed when the further amended first cross-claim naming the company as a cross-claimant was filed, nonetheless the cross-defendants have been present throughout the proceedings, at least in recent months and have participated in virtually all the interlocutory applications. Although perhaps the position is not so clear as it was in Chahwan, there is, therefore, an established litigious context which I think does engender a legitimate expectation on their part that they would have an opportunity to argue the question of leave. 7 But there is, it seems to me, a further reason why a prospective substantive defendant has an interest in an application such as the present, particularly where the corporation in question is in liquidation or otherwise apparently insolvent, or potentially so. Often, on a s 237 application and on equivalent applications in the inherent jurisdiction, questions arise as to what orders should be made making provision for the costs of the substantive proceedings as between the company and the applicants. The prospective defendant obviously has a significant interest in having a plaintiff that is worth powder and shot, and capable of meeting an adverse costs order. Although it is true such questions might be addressed, at least in part, by orders for security for costs, that is not so in the case where an individual is in any event suing in the proceedings in his or her own name. I think the prospective cross-defendants have a legitimate interest in being heard on the present application, in particular, because it may have significant costs implications for them in connection with the proceedings.

8 In short, the outcome of the application will affect the constitution of the proceedings to which they are already parties, and that is something on which it seems to me they are entitled to be heard.

9 Accordingly, insofar as it otherwise be required, I would grant leave to Mr Mawad, to Syndicate Mortgage Solutions and to Ozem Azzam Kassem to be heard on the present application.

10 The procedural background to the present application is set out in the judgment I have already delivered this morning. The substantive question for the Court now is whether, in its inherent jurisdiction, leave should be granted to Mr and Mrs El-Sayed to bring the first cross-claim, not only in their own name but also in the name of the company K & K Elsayed Pty Limited. Resort to the inherent jurisdiction of the Court, notwithstanding Corporations Act s 236 and s 237, is necessary in this case because the company is in liquidation, and it is now established by binding authority that those sections are not available in respect of a company in liquidation, [see Chahwan v Euphoric Pty Limited (2008) 65 ACSR 661]. However, the availability of the derivative action at general law, particularly in the case of a company in liquidation, survives the introduction of the statutory derivative action under s 237 [Chahwan v Euphoric (2008), above; Ragless v IPA Holdings Pty Limited (2008) 65 ACSR 700; Carpenter v Pioneer Park Pty Limited (2008) 66 ACSR 564, 573 [35] ].

11 As an aspect of its general equitable jurisdiction, courts have allowed a creditor or a member to sue in the name of a company in liquidation [Re Bank of Gibraltar v Malta (1865) LR 1 Ch App 69; Re Imperial Bank of China, India and Japan (1866) LR 1 Ch App 339; Cape Breton Company v Fenn (1881) 17 Ch Division 198, 201]. Although this has close analogies to the "exceptional circumstances" jurisdiction, pursuant to which the court will permit a beneficiary to sue in the right of a trustee where the trustee refuses to do so [see Chahwan v Euphoric Pty Limited [2009] NSWSC 805], there are differences, one being that in that jurisdiction there is no requirement first to obtain the Court's leave, because the beneficiary is asserting a right of the beneficiary in circumstances where the trustee is joined as a defendant, whereas in the present type of application leave to bring proceedings in the name of the corporation is required. On an application for the grant of such leave, the major issues to be considered by the Court are, first, whether the proposed proceedings have some solid foundation and exhibit such a degree of merit as to be neither vexatious nor oppressive and to present reasonable prospects of success; secondly, the attitude of the liquidator to whether the proceedings should be pursued; and, thirdly, whether "practical considerations support the initiating of the proceedings", with particular reference to financial protection of the liquidator and the estate of the company by means of indemnity of, if indicated, by security [see Vouris as Liquidator of Cadimas Express Pty Limited v Deputy Commissioner of Taxation (1999) 33 ACSR 527; Carpenter v Pioneer Park [34]].

12 Turning then to whether the proceedings exhibit a sufficient degree of merit to justify a grant of leave, there is little material on that question before the Court on the present application. However, from the course which the proceedings have taken to date, and their course before me today, it can be observed that in any event there are proceedings brought by Mr and Mrs El-Sayed on their cross-claim; that those proceedings have been set down for final hearing later in the year for five days; that while the company's action would introduce some additional elements, it largely overlaps the case already before the court, and that it has not been suggested on the present application, nor to my present recollection at any previous stage, that either the El-Sayeds' claim or their company's claim is hopeless or ought to be summarily dismissed or not allowed to go to trial.

13 Thus, while there is not before the Court much material on which to form a view, I would not refuse leave on the basis that the proposed claim was vexatious or oppressive or has no reasonable prospects of success. Its concurrence with the El-Sayeds' personal claim is a telling factor in this respect: the company's proceeding is unlikely to be vexatious or oppressive when there is a proceeding already on foot in which substantially the same relief is already sought, and it is not suggested that the proceeding already on foot should otherwise than go to trial. To add another party in those circumstances as cross-claimant could not reasonably be vexatious or oppressive.

14 The next question is the attitude of the liquidator. The evidence shows that the liquidator's attitude appears to be one of studied indifference. Attempts have been made to obtain an expression of the liquidator's attitude and the liquidator has not responded to those attempts. The liquidator has neither put forward any argument as to why the proceedings should not be pursued, nor expressed any objection to their being pursued, nor agreed to pursue them himself. This factor, therefore, favours the grant of leave.

15 The third matter is whether practical considerations with particular reference to financial protection of the liquidator and the estate of the company support the initiation of the proceedings. As I have recorded, the company is in liquidation. Strike-off proceedings are in progress, but presumably the cross-claimants will endeavour to bring that to a halt. The strike off proceedings were brought on the basis that the company did not have sufficient assets to pay the costs of an application for dissolution. Although the receivers sold assets of the company, the proceeds have apparently been consumed by secured creditors other than the plaintiff. It is difficult to see, in those circumstances, that the institution of the proceedings would occasion significant jeopardy to the estate of the company such as it is. It is clear that if the cross-claim were to succeed, that would be for the benefit of the company and its creditors. Success would result in either the avoidance of liability under the securities, or an award of damages for trespass, or both, any of which would enhance the estate of the company and benefit its unsecured creditors and, potentially, members. From the El-Sayeds' point of view, significantly, that would reduce their exposure under their own securities to Syndicate Mortgage Solutions. Because the application has been brought substantially in connection with and in support of the El-Sayeds' own application, and ultimately for their benefit - although it may also have benefits for creditors of the company, if successful - it seems to me that it is appropriate that the El-Sayeds should undertake to indemnify the company and the liquidator in respect of costs, and themselves to be responsible for any adverse costs order against the company.

16 For the foregoing reasons, I propose to grant the leave sought. My orders are:

Upon the first cross-claimant Khaled El-Sayed and the second cross-claimant Khayrieh El-Sayed undertaking to the court that they will pay and bear, and indemnify K & K Elsayed Pty Limited against, all costs, charges and expenses of and incidental to the bringing and continuation of the proceedings brought by them pursuant to this order, 2(a) including any adverse costs order made in these proceedings, and except in so far as the Court may in the future otherwise direct or allow, grant leave to the first cross-claimant Khaled El-Sayed and the second cross-claimant Khayrieh El-Sayed to bring the cross-claim in these proceedings in the name and on behalf of K & K Elsayed Pty Limited as third cross-claimant, as well as in their own right.

Order that the costs of the motion be the applicants' costs in the proceedings on the cross-claim.

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