Solicitors:
DEA Lawyers (Plaintiff/Applicant)
Sanford Legal (First and Second Defendants/First Respondent)
File Number(s): 2020/177268
[2]
EX TEMPORE JUDGMENT (REVISED)
The plaintiff is the Owners Corporation in respect of a strata development in Mortlake comprising 29 units and 4 commercial spaces. Construction of the development concluded in June 2014. These proceedings were commenced a little under six years later in June 2020.
The first defendant, Mr John Zouki, was initially named as the builder of the development. The second defendant, Hardy Pty Ltd, was named as the developer. The Owners Corporation now agrees, at least for present purposes, that Mr Zouki's late father, Mr Kevin Zouki, was the builder. The proceedings have been discontinued against Mr John Zouki and Mr Kevin Zouki has been joined as a defendant.
Mr John Zouki owns the majority of shares in and is the sole director of Hardy Pty Ltd, the developer.
The matter has progressed slowly in this list. The Owners Corporation's expert evidence was served in June 2023. The defendant has yet to serve its expert evidence, despite various directions to do so. That evidence is now due on 13 June 2024.
The Owners Corporation alleges that there are building defects in the Mortlake development, including fire safety defects. The Owners Corporation estimates that the likely cost of rectification of those defects is in the order of $1.2 million, and that, when other expenses, including a builder's overhead and profit, preliminaries, and the cost of a superintendent, are factored in, the total cost to the Owners Corporation will be in the order of $3.3 million.
The question before me is the Owners Corporation's application to extend the freezing order which currently restrains Hardy Pty Limited from dealing with its assets up to the figure of $3.2 million the subject of the Owners Corporation's claim. That order was made ex parte following the sale by Hardy Pty Limited of what appears to be its only asset, Unit 5 in the development, to a third party, Ms Juliane Lahood.
The Owners Corporation contends that for the purpose of s 37A of the Conveyancing Act 1919 (NSW) Hardy Pty Ltd sold Unit 5 to Ms Lahood with intent to defraud its creditors, including the Owners Corporation itself.
The Court has also made an order restraining Ms Lahood from dealing with Unit 5. That order was made separately although on the same occasion as the freezing order to which I have referred. Ms Lahood has been given notice of the making of those orders and of this application to extend them. She has not entered an appearance nor sought to be heard.
Hardy Pty Ltd, as the developer, accepts, for the purpose of this application, that there is a serious question to be tried that the development has the defects of which the Owners Corporation complains. Hardy Pty Ltd contends that it remains ready, willing, and able to rectify such defects as may be agreed between the parties or determined by the Court.
To sustain the existing injunctions, the Owners Corporation must show that it has a "good arguable case" to effect that:
1. the effect of the sale by Hardy Pty Ltd of Unit 5 to Ms Lahood is that it has disposed of an asset so as to bespeak a danger that any judgment obtained by the Owners Corporation against Hardy Pty Ltd will be wholly or partly unsatisfied; [1]
2. Hardy Pty Ltd has effected that sale with the intent of defrauding its creditors, relevantly, the Owners Corporation.
It is well-established that although the making of a freezing order is a serious step, the threshold that the Owners Corporation faces is not high and that what it must show is that there is a case "more than barely capable of serious argument". [2]
Mr Zouki caused Hardy Pty Ltd to exchange contracts with Ms Lahood to sell to her Unit 5 for $1.1 million. The contract was entered into in 1 March 2024. The sale settled on 21 March 2024.
Mr Zouki described the circumstances that led to those events in his affidavit as follows:
"22. Hardy has been the registered proprietor of the Unit from the time it acquired the lot for development up until the sale of the Unit on or about 21 March 2024.
23. I have not (in my personal capacity) been in any gainful employment or carried out any further developments since completing the development, the subject of these Proceedings. That was approximately 10 years ago. Furthermore, I have been retired for the last 2 years.
24. As a result, I have been living off the rental income received from the Unit which at the time was being rented for $1,200.00 per week.
25. I do not receive any social security benefits nor does my wife, Mandana Zouki.
26. Further, I am the carer for my brother, Simon (50 years old) and my mother Salma (82 years old).
27. Simon suffers from a brain tumour he has had since [he was] 16 years old and now suffers from mental health. He is in and out of treatment at Concord Hospital for mental health. My mother suffers from severe dementia. She suffered a strike sometime [in] July 2020 and this paralysed one side of her body. She requires daily care, however thankfully she is still of sound mind.
28. Since caring for my brother and mother, I have had to use my personal funds in order to provide them the best possible additional care available. I have also been paying the costs of this litigation… This has ultimately left me with little funds to support myself.
29. As a consequence of these issues, I have felt financial stress the last few years. I have been in contact with my bank over the last few years to enquire if I or Hardy could obtain a loan or line of credit against either the Unit and/or against my matrimonial home … ("Strathfield Property"), however, I have been refused every time because of my age (61 years) and because the bank does not believe I can service any loan(s).
30. For the above reasons, I was left with no other alternative but to sell the Strathfield Property. So, in November 2023 … I appointed Richardson & Wrench Real Estate Agents, Strathfield to sell the Strathfield Property. …
31. The exclusive agency period was from 27 November 2023 until 90 days after the auction.
32. The Strathfield Property was then listed for sale on 27 November 2023. Only 2 parties showed an interest in the Strathfield Property, and they were provided inspections in the week before Christmas 2023.
33. I then instructed the agent to list the Strathfield Property for auction. The Strathfield Property was listed for auction on 10 February 2024. It did not sell at auction. Since then, I have had 2 further interested parties, however the Strathfield Property has not sold to date.
34. The failure of not being able to sell the Strathfield Property caused me even more stress and anxiety. For this reason, and given the requirement to fund the defence of these proceedings and / or pay for rectification of defects should the Plaintiff afford Hardy with the opportunity, I then decided that Hardy's chances of selling the Unit would be easier as the sale price was lower than the Strathfield Property and it would attract a bigger buyer's pools, such as first home buyers, retirees or, people wishing to downsize etc.
35. On 26 February 2024, I engaged McGrath Partners, Strathfield to sell the Unit. I then signed an Exclusive Agency Agreement with them on 28 February 2024. …
36. In respect of the agent's commission of $1,000, my agreement with the agent was that if he agreed to charge me a normal commission to sell the Unit, that I would in turn given him the Strathfield Property to sell (if it had not sold) after the exclusive agency period expired...
37. [That same day], I recall receiving a telephone call from Mr Habib Lahood. I recall we had a conversation with words to the following effect:
Habib: 'Hi John, I just got a call from McGrath Real Estate Agents at Strathfield. They told me that they were ringing their database to see if anyone was interested in buying your Unit. Why, are you selling it?'
[John]: 'I have decided to sell the Unit as I need the money in order to support my wife, my children and my brother and in order to live day to day. I'm under financial stress at the moment. I'm quite embarrassed about all this, as this has never happened to me. I also need to continue funding the cost of the litigation to defend the proceedings as well as put aside money to rectify the defects.'
Habib: 'John, what do you want for the Unit?'
[John]: '$1.25 million.'
Habib: 'John, it is not worth $1.25 million given all the issues with the building. Everyone knows that this building has issues. I am prepared to offer you $1 million. You know I have hassled you in the past about selling me this unit over 4 years ago?'
[John]: 'Habib, I know, but I can't accept that offer. If you offer me $1.1m, then I will accept it.'
Habib: 'OK, done. $1.1m. I will have my lawyers contact your lawyers.'
38. I have known Habib for approximately 8 years, and we are friends. He is married to Julianne Lahood, who is the … Fourth Defendant in these proceedings."
Mr Zouki was not cross-examined on that affidavit, although Mr Byrne, who appeared today for the Owners Corporation, submits that I should be cautious in accepting a number of aspects of what Mr Zouki said in those passages.
The Owners Corporation's case is that the sale by Hardy Pty Ltd to Ms Lahood was at an undervalue.
In that regard, the agent engaged by Hardy Pty Ltd stated in the relevant agency agreement that an "estimated … selling price" of the property was $1.1 million.
Both parties have adduced expert evidence of value. The plaintiff's valuation expert expresses the opinion that Unit 5 at the relevant time was worth $1.6 million. The defendant's valuer expresses the opinion that it was worth $1.3 million.
Both valuers base their opinions on a review of comparable properties. Both adopted a similar square metre basis of valuation. However, the defendant's valuer appears to have proceeded on the basis that the area of car parking allocated to Unit 5 should not be taken into account when calculating its value. That difference in methodology appears to account for the difference in the conclusions to which the valuers have reached.
Both valuers assume that there were no defects in the common property of the building. As there is a serious question that such defects do exist, some discount would, one would have thought, be required to the opinions expressed as to value to account for this. Averaging the Owners Corporation case amongst all unit holders suggests that that discount might be in the order of $100,000 to $150,000, although precision is not possible at this stage.
It is neither necessary nor appropriate that I express any view about the competing opinions expressed by the valuers, save to say that it appears that there is a good arguable case that Unit 5 was worth something more than $1.1 million at the time Hardy Pty Ltd sold it to Ms Lahood.
There is also other evidence which is arguably of some concern so far as concerns the circumstances of sale. The evidence shows that Mr Zouki caused Hardy Pty Ltd to sell the Unit to a friend of his, did so very quickly and without testing the market. It also appears that the sale was completed a week earlier than required by the contract and very shortly after Mr Zouki's solicitor had received a letter from the Owners Corporation's solicitor suggesting concern about "the timing and sequence of this sale."
In his affidavit Mr Zouki did not give any evidence as to the use that he has caused Hardy Pty Ltd to make of the proceeds of sale of Unit 5, nor did he nor does Hardy Pty Ltd give the Court any assurance that the proceeds would be used only "to fund the defence of these proceedings and/or pay for rectification of defects should the [Owners Corporations] afford Hardy with [this] opportunity", to adopt the words he used in his affidavit.
Indeed, the clear implication from Mr Zouki's evidence is that he proposes to cause Hardy Pty Ltd to make the proceeds of sale available for the purpose of, perhaps amongst other things, meeting his family's domestic expenses.
Thus, Mr Campbell, who appeared for Hardy Pty Ltd, asserted in his submissions that Hardy Pty Ltd has "clearly been used by Mr Zouki to maintain himself and his family", and that Mr Zouki "has been living off income from the apartment for some time".
In those circumstances, I am satisfied that the Owners Corporation has a good arguable case that, absent restraint by a freezing order, there is a danger that any judgment that it might obtain will be wholly or partly unsatisfied because Hardy Pty Ltd will cause its assets, being the proceeds of sale of the Unit, to be "disposed of, dealt with or diminished in value". [3]
Of course, there will be no difficulty for Hardy Pty Ltd using the proceeds of sale of the Unit to pay the reasonable costs of these proceedings, as opposed to the living expenses of Mr Zouki and his family. The current freezing order has the usual carve out to accommodate that.
As to the Owners Corporation's proposed case under s 37A, it was less clear to me, at least at this stage, that the Owners Corporation will at trial establish that Hardy Pty Ltd sold Unit 5 with the intention of defrauding its creditors. I accept that such intention can be inferred and might be attributed to a party in the position of Hardy Pty Ltd if, as appears at least arguable in this case, a sale of Unit 5 at undervalue would have that effect. [4] However, I am satisfied, relevantly for present purposes, that the Owners Corporation's case about this is "more than barely capable of serious argument".
There was debate before me as to whether, assuming the freezing order were to be continued, it should be at the current level of $3.2 million or some other lower figure, bearing in mind the manner in which the Owners Corporation's quantity surveyor expert has summarised how that figure is calculated.
I think the wider question is why the freezing order should be expressed more broadly than to restrain Hardy Pty Ltd from dealing with the proceeds of sale of Unit 5 itself. It appears this is the only asset of Hardy Pty Ltd and thus the only asset against which the Owners Corporation could look, if ultimately successful.
As to the balance of convenience, if the freezing order were varied so as to only restrain Hardy Pty Limited from dealing with the proceeds of sale of the Unit, subject to a carve out for its legal expenses, it would, in effect, maintain the status quo.
In those circumstances, my conclusion is that, upon the Owners Corporation continuing the undertaking it has given to the Court as to damages and the other undertakings recorded in the current freezing order, I will continue the freezing order until the conclusion of the hearing or further order on the basis that it be varied by changing the figures in paragraphs 8(a) and 12(a) from $3.2 million to $1.1 million, and by deleting paragraph 10(a) providing the carve out for "paying ordinary living expenses". That was an appropriate carve out when the order was directed to Mr Zouki as well as to Hardy Pty Ltd. As the freezing order has already been varied so as to not apply to Mr Zouki, it is no longer appropriate that an "ordinary living expenses" carve out remain.
The order made by the Court restraining Ms Lahood from dealing with Unit 5 will expire today, 29 May 2024. As Ms Lahood has not appeared to make any submissions about the matter, I extend that order until the conclusion of the hearing or until further order.
I also direct the Owners Corporation to draw Ms Lahood's attention to the making of these orders, and once these reasons are published, to provide her with a copy of these reasons.
As the Owners Corporation seeks a special order for costs of today, I direct the parties confer and agree on a timetable for short written submissions on costs. I will decide that question on the papers unless either party seeks an oral hearing.
[3]
Endnotes
Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") r 25.11(1).
Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft mbH & Co KG "The Niedersachsen" [1984] 1 All ER 398 at 404 (Mustill J); cited in Errigal Ltd v Equatorial Mining Limited [2006] NSWSC 953 at [26] (White J); Pure Logistics v Scott & Anor [2007] NSWSC 595 at [12] (McDougall J); see my decision in Natural Raw C Pty Ltd v Bradshaw [2017] NSWSC 310 at [11].
UCPR r 25.14(4)(b)(ii).
See Cannane v J Cannane Pty Ltd (in liq) (1998) 192 CLR 557; [1998] HCA 26 at [12] (Brennan CJ and McHugh J); The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239 at [9109] (Owen J).
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Decision last updated: 06 June 2024