Szczygiel v Peeku Holdings

COUNSEL : T S Hale SC - Plaintiffs A Price, solicitor - First Defendant

M D Nikolaidis & Co - Plaintiffs SOLICITORS : Price & Company - First Defendant Submitting Appearance - Second Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST

2450/05 JOHN SZCZYGIEL & ORS v PEEKU HOLDINGS PTY LTD & ANOR JUDGMENT - Ex Tempore 1 HIS HONOUR: On 1 December 2005 this matter was listed for hearing before me. The hearing did not proceed. Rather, three separate applications were made to me. 2 The first was an application which was made by Mr Nikolaidis, who had acted as solicitor for the plaintiffs, for leave to cease to act. I did not grant that application, because I took the view that the plaintiffs had already terminated his instructions, and therefore the application was unnecessary. 3 I then took the unusual step of granting Mr Hale, of Senior Counsel, who had appeared for the plaintiffs in the course of some of the pre-trial steps in the case, leave to appear as amicus curiae. He suggested that I might, of my own motion, stand the proceedings over until the next Monday, to see whether the plaintiffs could obtain funding to enable them to pay lawyers to run their case. I declined that suggestion. Mr Hale and the solicitor instructing him then left the Court. 4 The plaintiffs did not personally appear. Thus, when the case was called on for hearing, and they did not appear, the first defendant sought to have the case dismissed, and the plaintiffs were ordered to pay the costs of that defendant. I granted that application. 5 Those events occurred after a lamentable series of failures to comply with Court directions on the plaintiffs' part. Those failures were summarised in my judgment of 1 December 2005. I will not repeat them here. However, the fact that I am not repeating them here does not mean that they are of little importance for the present application. In very brief summary, the plaintiffs had applied for expedition of the litigation, and been granted it. It was set down for hearing on 5 September 2005, but the state of the plaintiffs' preparation was such that it was necessary to vacate that hearing date. It was set down for hearing again on December 2005. Again, the plaintiffs were not ready. There had been warnings, in the course of the pre-trial preparation, that compliance with directions was necessary, and the legal advisers were aware of the precariousness of the situation that the plaintiffs were in as a result of non-compliance with directions. 6 The application before me today is a Notice of Motion which seeks to set aside the judgment which was entered on 1 December 2005. The application is made under Rule 36.16 of the Uniform Civil Procedure Rules 2005. That Rule provides that the Court may set aside or vary a judgment or order after it has been entered if, amongst other things, the judgment or order has been given or made in the absence of a party, whether or not the absent party had notice of the relevant hearing or of the application for the judgment or order. It is that Rule which applies, because the judgment which was pronounced on 1 December 2005 has been entered. 7 The application of that Rule needs to be made in the context of other provisions of the Civil Procedure Act 2005. Section 56 provides that the overriding purpose of the Act and of the Rules of Court in their application to civil proceedings is to facilitate the just, quick and cheap resolution of the real issues in the proceedings. The Court is required to give effect to that overriding purpose in exercising any power given to it by the Act. 8 Often, the just resolution of the real issues in the proceedings cannot occur without there being a trial of the merits of disputed facts. However, there are occasions when justice can require that proceedings be determined even if there is not a determination of disputed facts on the merits. 9 Section 57 sets out multiple purposes which the Court is to have regard to in furthering the overriding purpose set out in section 56. Those multiple purposes are the just determination of the proceedings, the efficient disposal of the business of the Court, the efficient use of available judicial and administrative resources, and the timely disposal of the proceedings, and all other proceedings in the Court, at a cost affordable by the respective parties. 10 Further, section 58 of the Civil Procedure Act 2005 sets out, in subsection 2, a power to have regard to a variety of matters in deciding what are the dictates of justice in a particular case. Those matters include: the degree of expedition with which the prospective parties have approached the proceedings (including the degree to which they have been timely in their interlocutory activities); the degree to which any lack of expedition in approaching the proceedings has arisen from circumstances beyond the control of the respective parties; the use that a party has made or could have made of any opportunity that had been available to the party in the course of proceedings, under Rules of Court; the practice of the Court or any direction of a procedural nature given in the proceedings; and the degree of injustice that would be suffered by the respective parties as a consequence of any order or direction. 11 Section 61 contains, as well as a general power for the Court to give directions, a specific provision, in subsection 3, that if a party to whom a direction has been given fails to comply with the direction, the Court may, amongst other things, dismiss the proceedings. 12 Given this complex of statutory provisions, it is within the specific intent of the statutory framework in which the Court conducts its business that it can on occasions be appropriate to dismiss proceedings, even though there has not been a hearing on the merits, in circumstances where there has been a failure to comply with directions. 13 I mention also that the circumstances in which the case came to be dismissed on 1 December were ones in which the matter had been set down and called on for hearing, the plaintiffs had had the opportunity to put forward the evidence and witnesses which they wished to put forward, and they had not availed themselves of that opportunity. The plaintiffs say that there is a reason for that having happened, but the fact remains that it happened. 14 The reason which the plaintiffs give for the earlier hearing not proceeding, is that two of the plaintiffs, Mr John Szczygiel and Mr Anthony Agius, are for all effective purposes impecunious. They had relied upon the other plaintiff, Mr Mark Szczygiel, to arrange the funding which was needed to put the plaintiffs in funds to pay lawyers to run the case. The evidence which Mr Mark Szczygiel gives, and which I accept, is that he persistently and over a period of months misled the other plaintiffs, and misled their solicitors, about the efforts which he was making to obtain funding. He gives an account of discussions which he had with the plaintiffs' solicitor, Mr Nikolaidis, in which Mr Nikolaidis gave him timely warning of the amount of money which would be needed to run the proceedings, and urged him to obtain a finance facility to be able to pay that amount. Mr Mark Szczygiel simply lied to Mr Nikolaidis about the efforts he was making, and how far advanced he was. This lead to a situation where, unwittingly, Mr Nikolaidis was misleading his opponents and the Court about the prospects of funding being obtained, and about how imminent the obtaining of funding was. It was the apparent imminence of funding, on at least some occasions, during the pre-trial preparation, which induced me, as the judge giving directions, to extend indulgences to the plaintiffs. 15 Mr Mark Szczygiel says that two different factors led him to mislead his co-plaintiffs and his solicitor. One of them was that he believed that he would be unable to procure the consent of his wife to any extension of the mortgage on his home to fund the litigation. He says that he had formed that belief because, when in 2003 she had agreed to extending the mortgage on the home, for the purpose of paying $100,000 to St George Bank, in partial repayment of a loan which St George Bank had given over the property which is the subject of this dispute, she had made it quite clear that she would not consent to any more loans being secured on the home. As well, he says he had misled his wife regarding the involvement of Mr Eddie Peeku in the purchase of the factory which is the subject of this litigation. 16 It was put to Mr Mark Szczygiel in cross-examination that the first of his explanations was incorrect. The basis for putting that proposition to Mr Szczygiel was that, in December 2005, Mr Mark Szczygiel's wife, and Mr Mark Szczygiel himself, had signed documentation whereby $150,000 was raised from a financier, Circuit Finance Australia Ltd, in circumstances where that financier was granted a charge over the home of Mr and Mrs Szczygiel. While it is apparent that, in December 2005, Mrs Szczygiel signed a document which said that she agreed to a charge being granted over her home, it by no means follows that, prior to her signing that document, her attitude had not been that she would not consent to any more loans being secured over the home. Even though Mr Mark Szczygiel's own account of himself is that he is someone who is on occasion prepared to mislead his wife - just as he had misled her concerning whether Eddie Peeku was involved in the purchase of the factory - I am still prepared to accept that the reasons he said he had for misleading his co-plaintiffs and his solicitors are the reasons he really had. 17 Even so, the fact is that it was because of his own deception that the plaintiffs found themselves in the situation in which they were on 1 December 2005. When he was the person who had been appointed by all the plaintiffs to look after the arranging of the finance generally, and when the other plaintiffs had no capacity themselves to raise finance, the deception which Mr Szczygiel engaged in is one which can be regarded as one which affects how all of the plaintiffs should be regarded in the present application. I hasten to say that I do not mean dishonesty is attributed to them as though it is their own dishonesty, but rather the consequences of his dishonesty are ones which they bear. 18 The Court is often reluctant to allow a judgment to be given when there has not been a hearing on the merits. The present dispute is one which relates to the title of some premises in Victoria Street, Smithfield. The title to those premises is held under the Real Property Act 1900, and the register shows that the plaintiffs, between them, own 9/20ths of the beneficial interest, and the first defendant owns 11/20ths. 19 The plaintiffs' case in the present proceedings is that the cause of that state of affairs of the register was that Mr Eddie Peeku (who is now deceased) had fraudulently entered the name of the first defendant on the contract, and on to the title documents, without informing the plaintiffs that that was what he was doing. 20 There are some difficulties in the way of the plaintiffs' claim. One of them is that Mr Westwood, a forensic documents examiner, who has put on an affidavit in the proceedings, is of the view that the photocopy document which the plaintiffs put forward as being a copy of the contract in the form in which they executed it is a fabrication. However, simply by reading the affidavit material filed in the case, one cannot tell where the truth lies, and this is the case which would ordinarily require a trial process to be gone through, to ascertain where the truth lies. 21 Mr Hale of Senior Counsel, for the applicants, accepts that if the application were to be granted, it would need to be on terms which did not result in the first defendant being any worse off, whatever the ultimate outcome might be of any trial, as a result of the judgment which has been obtained being set aside. To see whether that guideline upon which the Court might set the judgment aside is an achievable one, it is necessary to look in some detail to the financial facts which are relevant to the application. 22 One is that there are various costs orders on foot in favour of the first defendant. On 5 September 2005 the plaintiffs were ordered to pay the costs of that defendant thrown away by reason of the vacating of the hearing date which had been set for 5 to 9 September 2005, on an indemnity basis. Those costs are not yet quantified. Another order was made on 1 December 2005 that the plaintiffs pay the costs of the first defendant of the proceedings. 23 If the present application were to succeed, and the costs order made on 1 December 2005 set aside, it is inevitable that the plaintiffs would be required to pay the costs thrown away by reason of the matter not proceeding to a hearing on the merits on 1 December. Before the hearing on 1 December the first defendant was ready with its counsel briefed and all witnesses subpoenaed. 24 If the plaintiffs were to be let back in it would, it seems to me, be a necessary requirement that a fund be set aside to meet those costs orders, for costs thrown away. 25 As well, if this application were to succeed, because it is an application in which the plaintiffs seek an indulgence, there must be a realistic prospect at least that the plaintiffs would be ordered to pay the costs of the first defendant of the application. That would make three costs orders which the plaintiffs were required to meet. The total costs payable under those costs orders could conceivably be significantly more than $20,000. 26 The three plaintiffs are involved in the running of a business in the automotive industry, which is at present conducted through the medium of a company called White Eagle (NSW) Pty Ltd. That company carries on its business in the premises at Victoria Street Smithfield which is the subject of this litigation. 27 The balance sheet of the company as at June 2005 showed that it had a total negative equity of around $140,000. The profit and loss statement for the year ended 30 June 2005 showed that it made a loss of around $140,000. A further balance sheet of the company as at September 2005 shows that by then it had a negative equity of nearly $220,000, and in the 3 months to 30 September 2005 it incurred a further loss of a little over $78,000. 28 In December of 2005, the amount of $150,000 which I earlier mentioned was raised from Circuit Finance Australia Ltd, by White Eagle (NSW) Pty Ltd engaging in a sale and lease back of various equipment which it used in its business. The monthly lease instalment which will be payable under that lease is a little over $5,000. That needs to be paid, in addition to the sort of expenses which the company had been meeting in the 15 months up to the end of September 2005. 29 When that is the financial situation of the company, it is hard to have any confidence that the business will continue to operate for any length of time at all. If the business were to fail, the plaintiffs would, for at least a period of time, be out of a job. 30 If the judgment were to be set aside, the present state of the ordinary list in the Court is such that a hearing date could not be offered before July of this year. While the plaintiffs might apply for expedition, when they have already been given two expedited hearing dates and failed to meet both of them, their prospects of receiving a third expedited hearing date are poor. 31 Even if there were to be a hearing in July, a judgment would not necessarily be able to be delivered immediately. Given that the plaintiffs are seeking an indulgence in their application, it is in my view appropriate to err or the side of caution in estimating when it might be that a judgment could be given. In my view, it would be appropriate to proceed on the basis that, if the orders were to be set aside, the case might not be able to be resolved by judgment for another seven months. 32 The $150,000 which was raised in December has, apart from the expense involved in raising it, been paid into Mr Nikolaidis's trust account. There were sums of money already owing by the plaintiffs to Mr Nikolaidis, connected not only with this litigation, but also with some litigation involving St George Bank. 33 After payment of the amounts which were owing to him, and the costs of this present application, he estimates that there will be around $70,000 remaining from the amount which had been paid to him. It is proposed, by the plaintiffs, that that $70,000 should remain in his trust account, to provide part of a fund for payment of the costs of these proceedings, and also, possibly, of interest to St George Bank, which I will mention later. 34 Peter, Liza and Danuta Szczygiel, who are the mother brother and sister of Mark Szczygiel, have received a letter, dated 15 February 2006, from an entity called Home Loans National Coolangatta. That entity gives as its only addresses a Post Office Box in Coolangatta Queensland, a phone number and a facsimile number. That letter addressed to Peter, Danuta and Lisa Szczygiel says, "I am pleased to advise that your requests for refinancing and increases have been assessed and funds totalling $160,000 have been allocated. I would expect settlement to take place within the next ten days or so. Should you have any further questions please call me." 35 Each of them has sworn an affidavit, in which they say that they, between them, own property at 14 Maculata Place, Orchard Hills, and 1 Grandis Place Orchard Hills. Those properties have, it seems, been offered as security for the loan. There is no evidence before the Court of what equity there is in the properties, or of what other mortgages there are on those properties, if any. Each of Peter, Lisa and Danuta Szczygiel say that when the loan becomes available they propose making the entire sum available to the plaintiffs to enable them to meet the costs and expenses associated with this present litigation. 36 Inevitably, there will be some costs involved in the obtaining of the loan, and the provision of security concerning the loan. One could not be confident that more than $150,000 would be available, if the loan were to proceed to settlement, after all those expenses had been paid. As well, the letter which they have received is the sort of letter which, in the ordinary course of things, is not a formal letter of offer of a loan, and does not indicate the conditions upon which a loan would be made available by a lender. It is not possible at present to know, for instance, whether the lender will require a more stringent security than they can provide, or whether any valuation conditions which the lender might impose would be able to be met. As well, while I accept that it is their present intention to make the sum available to the plaintiffs, there is nothing actually obliging them to pay the money. The evidence in this case reveals prior instances of Mark Szczygiel being promised a loan by a relative to pay the costs of this litigation, and those funds not materialising. Thus, the obtaining of money as a consequence of the letter of approval cannot be regarded as a certainty or even more likely than not. If the money does not come through, the plaintiffs will not be able to pay even their own costs of running the case. 37 Even if the money were to eventuate, that would result in there being of the order of $220,000 in Mr Nikolaidis' trust account. Mr Nikolaidis' estimate of the costs of the plaintiffs in running the matter, if the matter was to last for not more than six hearing days, is $120,000. That is an estimate to which Mr Mark Szczygiel deposes in an affidavit sworn 22 December 2005. Thus, it presumably takes into account the extent to which preparation work had been done up to that time. It is likely that very little, if any, preparation has been done between 22 December 2005 and today. When the matter was set down to be heard in early December 2005, seven hearing days were allocated. In my view it would not be safe to assume that the case would take less than seven days. At that rate, the plaintiffs' own costs for the hearing would be of the order of $140,000. 38 The premises which are the subject of the litigation are mortgaged to St George Bank. The loan to St George Bank is in default. Default interest is accruing on the loan to St George Bank at a rate which is just a little short of $5,000 per month, although the amount does vary from month to month. 39 St George Bank appointed a receiver of the premises, under its mortgage, as early as August of 2004. 40 The loan account relating to the St George Bank loan is in evidence, in part. It shows that during 2005 a payment was made on the St George Bank loan account on 10 February 2005, but after that nothing more was paid off the account for the entire year, apart from one amount of a little over $2,500 which was paid in August 2005. That amount was less than the amount of interest which accrued in one month. Nor was anything paid off the account in 2006 up to 19 January 2006, the date when the statement which was tendered into evidence ends. 41 Mr Hale accepts that if the judgment were to be set aside it would be necessary to provide for the payment of ongoing interest on the St George Bank loan, so that the first defendant's equity position did not get any worse. 42 The financial situation of the plaintiffs is such that one could not have any confidence that they themselves would be able to pay that $5,000 per month. The cash flow generated by the business of White Eagle (NSW) Pty Ltd does not seem as though it can bear it either, even if that business were to survive. Thus, the only way in which it could be provided for with any certainty would be if it were required to be paid from the funds proposed to be held by Mr Nikolaidis. Thus, those funds, of $220,000, if the loan to Peter, Lisa and Danuta comes through and eventually makes its way to Mr Nikolaidis's trust account, would need to fund expenses of at least $20,000 for the costs orders to date, $140,000 for the plaintiffs' own cost of running the litigation, and $35,000 to cover St George Bank interest over seven months. That makes a total of $195,000. That would leave $25,000 in the account. That would be the only asset which the plaintiffs would be likely to have available, apart from their interest in the premises the subject of the litigation, to pay any costs order of the proceedings which might be made against them if they were to lose. 43 The debt which is owing to St George Bank, at present, secured by the premises is of the order of $680,000. It seems that the value of the property is at least a million dollars, so there is about $320,000 of equity left in the property at the moment. On the basis of those figures, even if the plaintiffs lose, they would be entitled to 45% of that equity, which is around $144,000. That figure could be subject to shrinkage for selling costs, and perhaps some depreciation in selling price which there might be if there were to be a forced sale. The result is that, even if the loan to Peter, Lisa and Danuta Szczygiel results in money being paid to Mr Nikolaidis' trust account, it would be a very near thing whether the plaintiffs would be in a position where they would be able to pay the costs of the first defendant, if they were to run the proceedings and lose. 44 As well, if the first defendant were to win, there is a question of whether it would be entitled to some sort of an occupation rent. One of the complaints which it makes is that it has been excluded from the premises by the plaintiffs, and sometimes co-owners who are excluded from premises are entitled to occupation rents. There has been no attempt at quantification of an occupation rent or estimation of how long it might run on, by any of the parties. In those circumstances, I will accord it little weight. 45 A final factor concerns what prejudice might be suffered by the parties if the order were to be made. The prejudice which the plaintiffs will suffer if the order is not made is that they will not have a third chance of running this case on its merits. When they have already been accorded two chances, and the reason why those chances were not availed of was because of the deception of one of the plaintiffs and repeated breaches of court orders, this factor does not have the weight it otherwise might. 46 The situation of the first defendant, and people connected with it, also needs to be considered here. St George Bank as mortgagee obtained an order for possession of the premises on 4 July 2005. The operation of that order was stayed until 9 December 2005. That stay has now expired. As at 22 December 2005 no application had been made to extend it. I am told by counsel that an application has now been made for the court to impose a further stay, in part on the basis that this present application is being brought. There is no indication of how the costs of that application for a stay will be paid - and by "the costs" I mean both the plaintiffs' own costs of the application, and the costs of St George Bank connected with the application in the event that the plaintiffs are ordered to pay the costs of St George Bank. That is another matter which makes it a very near thing as to whether the plaintiffs would be able to meet the costs of the first defendant if they were to be let in to run the action again, but to lose. 47 I have already mentioned the way that there was only one payment, of a comparatively small amount, made on the St George Bank mortgage in the more than 11 months after 10 February 2005. I have already mentioned the way in which two of the plaintiffs, Mr Agius and Mr John Szczygiel, own no real property other than their interest in the property which is the subject of the dispute. They tell the Court quite frankly that they have no capacity to borrow money. Mark Szczygiel owns a home as joint tenants with his wife. That home is subject to one registered mortgage (the amount secured by which is not in evidence), and a caveat to support the equitable charge which has been granted to the financier with whom White Eagle (NSW) entered the sale and lease back arrangement in December 2005. 48 St George Bank holds a collateral security for the loan, which has been provided by the first defendant over commercial premises it owns at Wetherill Park. St George Bank does not presently hold any collateral security provided by the plaintiffs. 49 When the loan which has been made by St George Bank to the plaintiffs and the first defendant to acquire the property subject to the dispute went into default, that also amounted to an event of default concerning the first defendant's own banking facilities. In May of 2005 a bank officer told Mr Steven Peeku, "If this matter takes any longer than 6 months, then the bank will exercise another option which is to sell up your property at Wetherill Park and pay up the debt that way". That property at Wetherill Park is one in which Mr Peeku's family has conducted its business for something like seven years. In June 2005 St George Bank stopped the first defendant's overdraft account and informed Mr Peeku that it did not want to do business with him any more. As well, St George Bank has threatened to pursue personal guarantees that were issued by Mr Steven Peeku and his brother Richard. 50 There is no indication in the evidence that the bank has changed its attitude in any way. It is well within the realm of possibility that before the present action can be heard the bank will decide to enforce one or other of its securities besides the property at Smithfield. 51 The terms which Mr Hale proposed for setting aside judgment were that the money raised from the proposed loan of $160,000 to Peter, Lisa and Danuta be paid into Mr Nikolaidis' trust account with an irrevocable authority that it be used to pay the costs of these proceedings or to pay interest security to St George Bank. He also proposed that the granting of liberty to proceed with the action be reviewable if circumstances arose where the first defendant was prejudiced, so that the it could approach the Court in such an event for the imposition of further terms. He also proposed that the plaintiffs proceed with expedition. 52 He also submitted that the plaintiffs would pay the monthly interest to St George Bank, so as not increase the indebtedness. However, I am not persuaded that they have any capacity to do so, other than from money which might be raised from the possible future loan to Peter, Lisa and Danuta Szczygiel. 53 I am not satisfied that conditions like these would adequately protect the first defendant. There is really nothing stopping St George Bank from exercising its securities. If it did decide to take action to enforce a security other than the Smithfield one, it could result in damage to the first defendant, and people connected with it, which could not be adequately remedied by the first defendants, after the event, coming to the Court and asking for some extra terms (the nature of which are at present not very clearly formulated) to be imposed. Furthermore, the kind of damage which could arise from the other securities being realised by St George Bank, involving as it does interference with a business, is the kind of damage which is not readily compensable in money. St George Bank has been quite patient so far, but one cannot have confidence its patience will endure for 7 months. If the plaintiffs were successful in obtaining a stay of the judgment for possession which St George Bank has obtained over the Smithfield property, that is the sort of event which would only increase the chances of St George Bank deciding that it wanted to enforce one of its other securities. 54 In all these circumstances, I am not satisfied that it would be practical for a regime to be set up which would adequately protect the first defendant, and those associated with the first defendant, against the risk of sustaining further loss as a consequence of the plaintiffs being given their third opportunity to run the action. 55 As well, the repeated and gross defaults of the plaintiffs, in failing to be ready to meet the two hearing dates which were allocated to them, does not make their application one which calls out to be granted. 56 In all these circumstances, the plaintiffs' application is rejected. I order the plaintiffs to pay the first defendant's costs of this application. **********

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