Xenos v FAL Healthy Beverages Pty Ltd

Court of Appeal (NSW)|2017-09-18|Before: Gleeson JA, Mr J

(No 2) [1994] 2 Qd R 563 Starr-Diamond v Diamond [2013] NSWCA 7 Swift v McLeary [2013] NSWCA 173 Transglobal Capital Pty Ltd v Yolarno Pty Ltd (2004) 60 NSWLR 143; [2004] NSWCA 136 Category: Procedural and other rulings Parties: Timothy Xenos (aka Efthymios Xenos) (Appellant) FAL Healthy Beverages Pty Ltd (First Respondent) FAL Retail Pty Ltd (Second Respondent) Representation: Counsel: No appearance (Appellant) Mr J Arnott (Respondents)

Solicitors: Reuben George Lawyers (Appellant) Dentons Australia (Respondents) File Number(s): 2017/165290 Decision under appeal Court or tribunal: Supreme Court of New South Wales Jurisdiction: Equity Division Citation: [2017] NSWSC 476 Date of Decision: 27 April 2017 Before: Black J File Number(s): 2016/80389

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

Judgment

GLEESON JA: Application is made by the respondents, FAL Healthy Beverages Pty Ltd and FAL Retail Pty Ltd (together FAL or the respondents), that the appellant, Tim Xenos (aka Efthymios Xenos) (Mr Xenos), provide security for costs of the appeal filed on 11 July 2017. The amount of security sought in the amended notice of motion is $70,000.
Notwithstanding orders made by the Registrar on 6 September 2017 that Mr Xenos file and serve any evidence upon which he relies in response to the application by 13 September 2017, Mr Xenos did not file and serve any evidence. At the commencement of the hearing, Mr G D McDonald of counsel indicated that his instructions to appear on behalf of Mr Xenos had been terminated and he was excused from further attendance. The matter was called outside court, but there was no appearance by or on behalf of Mr Xenos.
The essential issue is whether the respondents have shown "special circumstances" which enlivens the discretion to order security for costs under the Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 51.50.

Decision below

In March 2014, FAL brought proceedings against Mr Xenos, who was relevantly chief executive officer of the FAL companies from November 2013 until January 2016. Freezing orders were made against Mr Xenos in March 2016, and varied on 10 May 2016 increasing the amount frozen to $980,000. Those orders remain in place, and have recently been extended by consent to 23 December 2017.
On 27 April 2017, after a trial lasting five days, the primary judge (Black J) found that Mr Xenos had breached his duties as director and officer owed to the FAL companies by improperly authorising payments in respect of a large number of transactions, which fell into four categories: (1) to himself or companies related to him; (2) for legal fees related to his bankruptcy; (3) to his solicitors, which funds were ultimately used to pay his trustee in bankruptcy and creditors; and (4) for speeding and traffic infringements. On 15 May 2017, his Honour ordered Mr Xenos to pay $1,015,013.46 to the FAL companies plus costs. (The judgment in favour of the first respondent was for $966,735.95 and the separate judgment in favour of the second respondent was for $48,277.15.)
Mr Xenos belatedly applied, by notice of motion filed 6 September 2017, for a stay of the judgment pending appeal. That motion, which was listed for hearing on 18 September 2017, was dismissed with costs on that day, when, as I have said, there was no appearance by Mr Xenos, after Mr McDonald of counsel indicated his instructions to appear had been terminated.

Notice of appeal

The notice of appeal raises three grounds. Ground 1 is divided into three sub-grounds. Ground 1(a) asserts that the primary judge reversed the legal onus of proof of the facts from the respondents to Mr Xenos. This is a reference to his Honour's reasons at [41] under the heading "Evidentiary onus", where his Honour accepted a submission by the respondents that: … where relevant facts are peculiarly within the knowledge of the defendant or where the defendant has greater means to produce evidence relating to those facts, then provided the claimant provides sufficient evidence from which the matter can be inferred, the defendant "comes under an evidential burden, or an onus of adducing evidence": Hampton Court Ltd v Crooks [1957] HCA 28; (1957) 97 CLR 367 at 371-2; Krstic v Brindley [2006] NSWSC 1414 at [26]; BCI Finances Pty Ltd (in liq) v Binetter (No 4) [2016] FCA 1351; (2016) 117 ACSR 18 at [122]. In BCI Finances Pty Ltd (in liq) v Binetter (No 4) above at [123], Gleeson J observed that: "[w]here a fact is peculiarly within the knowledge of a party to litigation, slight evidence of that fact may suffice to prove the fact unless that evidence is explained away by the party with the knowledge of the fact".
His Honour acknowledged in the same section of his reasons that the respondents bore the legal onus in relation to the matters asserted by it, having regard to the Briginshaw considerations in s 140 of the Evidence Act 1995 (NSW): at [44]-[46]. His Honour expressly stated that he approached his consideration of the facts in issue in relation to each transaction on that basis: at [46].
The respondents emphasised that his Honour's approach to the question of onus of proof was entirely orthodox and consistent with Blatch v Archer (1774) 1 Cowp 63; 98 ER 969 at 970.
Ground 1(b) and ground 2 are related. They assert that his Honour erred in taking into account s 286(1) of the Corporations Act 2001 (Cth) when dealing with Mr Xenos' submission concerning the absence of documentary support for many of the impugned transactions, since compliance with that provision was not a matter pleaded.
Section 286(1) provides that a company is obliged to keep written financial records that correctly record and explain its transactions, financial position and performance, and that would enable true and fair financial statements to be prepared and audited. His Honour noted that a director who fails to take all reasonable steps to comply with or secure compliance with that obligation contravenes s 344(1) of the Corporations Act.
The respondents emphasised that s 286 was referred to in submissions below without objection by counsel for Mr Xenos, and that his Honour had regard to s 286 merely to inform his consideration of the content of Mr Xenos' obligations as a director and officer under the Corporations Act, ss 180-182, the breach of which was expressly pleaded. The respondents correctly point out that his Honour did not make any finding as to whether Mr Xenos had himself breached s 286 or had been involved in any breach of that provision.
Ground 1(c) asserts that the evidence of Mr Fontanot, a partner from Ernst & Young, who had provided a report reviewing the impugned transactions, was not sufficient to establish the basis of the claim against Mr Xenos.
The respondents emphasised that the evidence below was not limited to that given by Mr Fontanot. Further, his Honour found at [112] of his reasons that Mr Xenos' submission concerning Mr Fontanot's evidence did not have sufficient regard to the extent of documentary evidence, including bank statements, which exist in respect of the impugned transactions. His Honour rejected the complaint by Mr Xenos that it was necessary for Mr Fontanot to make enquiries of third parties, where any evidence which would have been available from third parties to provide justification for the relevant transaction could equally have been led by Mr Xenos.
Ground 3 asserts that his Honour erred in not accepting that any damages payable by Mr Xenos in respect of payments he caused to be made by FAL to the law firm Yates Beaggi, should be reduced by the amount paid by Yates Beaggi and its principals under a settlement agreement reached with the respondents on 8 February 2017. (The amount of that settlement is confidential and it is not necessary to refer to the quantum in these reasons).
After noting that the size of the respondents' claim against Yates Beaggi was for at least $12 million and involved additional claims against Yates Beaggi which were not made against Mr Xenos, his Honour found (at [169]) that Mr Xenos was not entitled to a credit for the amount recovered by FAL from Yates Beaggi under the settlement.
In reaching that conclusion his Honour applied well-known principles and referred to the statement in RACV Insurance Pty Ltd v Unisys Australia Ltd [2001] VSC 300 where Hansen J referred to the statement of the relevant principles in Banque Keyser Ullman SA v Skandia (UK) Insurance Co Ltd (No 2) [1988] 2 All ER 880 and Boncristiano v Lohmann [1998] 4 VR 82 and summarised the principle as having the effect that: "When a plaintiff sues two defendants and settles with one but continues to judgment against the other, in the calculation of damages payable by the latter the plaintiff is entitled to treat the settlement sum as allocated first to any claim separate and additional to any claim that was common to the defendants and the costs of that separate claim; and, secondly, any excess of the settlement sum necessarily referable to the common or overlapping claim is to be credited in favour of the second defendant."
His Honour also referred to the observation by Nettle and Redlich JJA in Morris v Riverwild Management Pty Ltd (2011) 38 VR 103; [2011] VSCA 283 at [56] that: Where several defendants are severally liable for parts of a plaintiff's claim, the general principle is that one such defendant is not entitled to credit in respect of payments made by other defendants unless and until the total of the payments made by the other defendants exceeds the difference between the plaintiff's claim and that part of the claim for which the defendant is seeking credit is liable.

Legal principles

Special circumstances must be shown before an order for security for costs of an appeal can be made under UCPR r 51.50.
The considerations engaged by the concept of "special circumstances" were considered by this Court in Transglobal Capital Pty Ltd v Yolarno Pty Ltd (2004) 60 NSWLR 143; [2004] NSWCA 136 (Beazley, Santow and Ipp JJA), and in Porter v Gordian Runoff Ltd [2004] NSWCA 171 (Bryson JA, Sheller and Giles JJA agreeing).
In Preston v Harbour Pacific Underwriting Management Pty Ltd [2007] NSWCA 247 at [18], Basten JA identified the following principles: (1) that no order for security should be made in the absence of "special circumstances"; (2) that consideration of what may constitute special circumstances should not be fettered by some general rule of practice; (3) that impecuniosity, without more, will usually be insufficient; (4) that an order may be appropriate if the appeal is shown to be hopeless, unreasonable or of an harassing nature; (5) that where a bona fide and reasonably arguable appeal would be stifled by an order for security, such an order should usually not be made; and (6) the subject matter of the appeal, including an issue as to the liberty of the individual, or a public interest may provide a reason for not imposing a security order which would stifle the continuation of the appeal.
The last two factors, it was suggested by Basten JA, might better be seen as being relevant to the exercise of the discretion rather than as potential special circumstances.
When weighing all the circumstances of the case in the exercise of the discretion to order security for costs, it is necessary to keep in mind that the weight to be given to any circumstance depends not only on its own intrinsic persuasiveness, but upon the impact of the other circumstances which have to be weighed (see P S Chellaram & Co Ltd v China Ocean Shipping (1991) 102 ALR 321 at 323; [1991] HCA 36 per McHugh J).

Special circumstances

The respondents submitted that the following circumstances taken together constitute special circumstances justifying an order for security for costs of the appeal: 1. the appeal does not have reasonable prospects of success; 2. the appeal has not been brought bona fide; 3. there is a real risk that, if successful, the respondents will not be able to recover their costs of the appeal from Mr Xenos; 4. Mr Xenos has not paid the judgment debt or costs order below; 5. the appeal raises issues which were not taken at trial; 6. the appeal seeks to agitate almost all of the factual and legal issues raised at trial.
Before addressing these matters, it is appropriate to refer to the evidence concerning Mr Xenos' financial position.

Financial position

As indicated, Mr Xenos did not file any evidence concerning his financial position in response to the application for security for costs. The respondents tendered affidavits sworn by Mr Xenos in the proceedings below and in bankruptcy proceedings in the Federal Circuit Court of Australia. Those affidavits revealed the following: 1. Mr Xenos' financial position, as at 6 May 2016, was net assets of $841,863.23. 2. In a recent affidavit sworn by Mr Xenos on 11 July 2017 in bankruptcy proceedings in the Federal Circuit Court of Australia, Mr Xenos deposed: But for the debt to the respondents, I am solvent and I am able to live a relatively normal life working in an interesting job, which involves overseas travel and caring for my family.
I am satisfied that Mr Xenos is impecunious or of very limited means in the sense that he is not in a position to pay the judgment debt and costs below, or any costs order, if the appeal is unsuccessful. I accept that impecuniosity alone is not sufficient to constitute special circumstances, but it may do so when combined with other factors: Preston v Harbour Pacific Underwriting Management Pty Ltd at [18].
Mr Xenos bears an evidentiary onus of establishing that any order for security would stultify his appeal, although the ultimate onus establishing special circumstances rests on the respondents: Marks-Isaacs v Fowler [2005] NSWCA 37 at [24] (Handley JA); Bell Wholesale Co Ltd v Gates Expert Corporation (1984) 2 FCR 1 at 4. Given the absence of evidence from Mr Xenos on this application, Mr Xenos has not demonstrated that the appeal would be stultified if security were ordered.

Prospects of success

The respondents submitted that the appeal does not have reasonable prospects of success and accordingly there is a real risk that defending it will involve the respondents incurring unnecessary costs.
Since Mr Xenos has not appeared to contest this submission, it is necessary to make a preliminary assessment of the merits of the appeal. For this purpose, I have read and considered the 90-page judgment of the primary judge, together with the notice of appeal, and an unsigned document headed "Outline of Submissions / Notice of Appeal" annexed to an affidavit sworn by Mr Xenos on 11 July 2017 in the bankruptcy proceedings.
In his reasons for judgment, his Honour made an adverse credit finding that "Mr Xenos is not a witness of truth and that no reliance should be placed on his evidence unless it is against his interests or corroborated by other evidence": at [25]. Among other matters, his Honour found that Mr Xenos provided, on a number of instances, false or misleading information to his trustee in bankruptcy. (Mr Xenos had been made a bankrupt on 9 August 2011.) His Honour also found that Mr Xenos created false documents and made false statements to further his interests, and procured others, including his solicitors, to assist him to do so: at [39]. His Honour analysed in some detail the evidence relating to each of the impugned transactions (at [66]-[176] of his reasons) before reaching the conclusion indicated above.
The legal errors asserted in grounds 1 and 2 are difficult to detect on a preliminary review, but in any event, even if error was established, this Court must consider whether "a substantial wrong or miscarriage has thereby been occasioned" before it orders a new trial: UCPR, r 51.53(1). That is, the Court must consider whether the errors are immaterial because the judgment can properly been supported on other grounds.
In this case, the primary judge analysed in some detail the evidence relating to each of the impugned transactions (107 in total) and made credit-based factual findings against Mr Xenos, when rejecting his various explanations for the impugned transactions. The notice of appeal does not grapple with what needs to be established for an appeal against credit-based factual findings to succeed: Fox v Percy (2003) 214 CLR 118 at [26]-[31].
With respect to ground 3, Mr Xenos has not identified any arguable basis for distinguishing the authorities which the primary judge relied upon for the approach he took in relation to not giving credit for the payments received by the respondents from another wrongdoer, against who additional claims were made far exceeding the quantum of the claim against Mr Xenos.
My preliminary assessment is that the appeal has very little prospects of success.

Bona fides of the appeal

Counsel for the respondents emphasised that Mr Xenos does not challenge the adverse credit findings by the primary judge. Counsel for the respondents submitted that, in those circumstances, the Court cannot have any confidence that the appeal has been brought bona fide.
It may be accepted that his Honour's credit findings and the related findings that Mr Xenos breached his duties to FAL by misappropriating funds, involve a finding of serious wrongdoing by Mr Xenos. While the absence of appeal grounds challenging the credit-based findings raises a doubt as to the motives of the appeal, I am not in a position to make a finding as to any lack of bona fides in bringing the appeal.

Risk that costs will not be recoverable

The respondents submitted that there is a real risk that, if successful, they will not be able to recover their costs of the appeal from Mr Xenos. Counsel for the respondents pointed to two matters. First, the evidence of Mr Xenos' financial position (tendered by the respondents) indicated that he was unlikely to be able to meet any costs order if the appeal was unsuccessful: see [24] above.
Second, that there is a real risk that Mr Xenos may seek to understate or divest his assets with the intention of avoiding the consequences of any costs order in the appeal. Counsel for the respondents pointed to the successive disclosure affidavits made by Mr Xenos in the proceedings below which were necessary because the respondents discovered that Mr Xenos held overseas bank accounts which he had not disclosed in his earlier affidavits.
In Swift v McLeary [2013] NSWCA 173 at [45], I expressed the view that any dissipation of assets which affects the ability of a successful respondent to recover costs may amount to special circumstances for the purposes of UCPR, r 51.50 referring to JM Properties Pty Ltd v Strata Corporation No 13975 Inc [2006] SASC 227; Shannon v Australia and New Zealand Banking Group Ltd (No 2) [1994] 2 Qd R 563.
Swift v McLeary concerned the disposal of assets post-judgment by an appellant and corporations in which the appellant had an interest, in circumstances that ultimately led to freezing orders being imposed against the appellant.
The present case is distinguishable. Here, the freezing orders were imposed before the entry of judgment below. While it may be inferred that the freezing orders were made because FAL established a prima facie case and a danger that Mr Xenos would dispose of assets in order to defeat any judgment that might be obtained against him (Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 321-322 (Gleeson CJ), 326 (Meagher JA)), I was not taken to the evidence relied upon by FAL when obtaining the freezing orders. It should not be inferred, on the materials provided on this application, that there is a danger that Mr Xenos may divest his assets, contrary to the terms of the existing freezing order.
Nor should it be inferred, in the absence of any challenge by the respondents in the proceedings below, that Mr Xenos has understated his assets in his affidavit sworn 6 May 2016. That affidavit included the overseas bank accounts that had been omitted from his earlier disclosure affidavit sworn 12 April 2017. The explanation given by Mr Xenos for that omission might be open to doubt, in circumstances where he apparently had legal representation at the time of swearing his earlier affidavit. (Mr Xenos deposed to his belief that the freezing order was specific to Australian assets only, and that he believed that assets meant real property). However, that explanation was not and could not be tested on the present application.
Nevertheless, I accept that it may be inferred from the evidence of Mr Xenos' financial position that there is a real risk that the respondents, if successful, will not recover the costs of the appeal from Mr Xenos.

Non-payment of judgment and costs below

Given that the judgment and costs order made by Black J would be set aside if the appeal was successful, the failure to pay the judgment and costs is not of itself a special circumstance warranting a stay pending the provision of security of the costs of the appeal: Pi v Zhou [2017] NSWCA 16 at [63] (Payne JA, Sackville AJA agreeing).

Nature of the appeal

Counsel for the respondents submitted that the appeal raises issues which were not taken at trial and that may constitute a special circumstance, referring to Gray t/as Clarence Valley Plumbing v Ware Building Pty Ltd [2012] NSWCA 438 at [10] (Ward JA). That submission should be accepted.
Counsel for the respondents submitted, and I accept, that Mr Xenos did not dispute at trial the approach stated in the authorities in relation to onus of proof referred to at [41]-[45] of his Honour's reasons, he did not contend at trial that it was inappropriate for his Honour to have regard to s 286 of the Corporations Act and he did not take issue with the legal principles relating to double recovery referred to at [166]-[167] of his Honour's reasons.
The respondents raise a further matter. They contend by analogy with Ballard v Brookfield Australia Investments Ltd [2012] NSWCA 434 (Ballard) that the scope of the appeal that Mr Xenos intends to bring seeks to agitate almost all of the factual and legal issues raised at trial and that "there must be a very real risk that costs will be unnecessarily incurred by the respondents to the appeal (in the sense that if the appeal were confined to more narrow grounds of appeal those costs would be minimised)": Ballard at [28].
The solicitors for Mr Xenos suggested in correspondence sent to the respondents' solicitors dated 31 July 2017, that it will not be necessary on appeal to revisit and review the extensive documentary and oral evidence that was dealt with during the trial. (Counsel for the respondents indicated that there were 12 folders of documents tendered at the trial). Mr Xenos' solicitors contended that the error by his Honour in wrongly reversing the onus of proof did not require this Court to delve into an analysis of the facts. That submission overlooked that to succeed on appeal, Mr Xenos must demonstrate that his Honour not only mis-stated the correct approach to the onus of proof, but also mis-applied the correct approach.
The respondents correctly submitted that appeal grounds 1 and 2 necessarily involve an examination of the documentary and oral evidence concerning each of the 107 impugned transactions. It is apparent, notwithstanding Mr Xenos' suggestion to the contrary, that he seeks to review the primary judge's decision in relation to each impugned transaction. That will require the respondents to incur considerable costs in advance of the appeal addressing the evidence relating to each impugned transaction.

Conclusion

I am satisfied that special circumstances have been shown which enliven the discretion to order security for costs under UCPR, r 51.50. While mere impecuniosity will not ordinarily justify an order for security for costs, here there are additional matters which, in combination, are capable of constituting special circumstances including Mr Xenos' very weak prospects of success in the appeal; the raising of new points on appeal which were not taken at trial; the wide ranging scope of the issues sought to be agitated on appeal; the absence of evidence that the appeal would be stultified if security were ordered; and the substantial risk that if successful, the respondents would not recover their costs of the appeal from Mr Xenos.
I also take into account, notwithstanding the termination of Mr McDonald's retainer as counsel, Mr Xenos' apparent willingness and apparent ability to fund his own costs of the appeal, at least to date, in circumstances where, as I have said, there is a substantial risk that if successful, the respondents will be deprived of costs: Starr-Diamond v Diamond [2013] NSWCA 7 at [19] (Hoeben JA).

The appropriate orders

In terms of quantum, the respondents seek an amount of $70,000 based on their solicitor's unchallenged estimate of their actual costs and disbursements, including counsel's fees of $90,714 (including GST), and an expectation that up to 65 percent to 75 percent of the respondents' solicitor/client costs will be recovered on a costs assessment, plus 100 percent of disbursements (including counsel's fees).
The respondents' solicitor estimated that the likely total of the party/party costs are therefore in the range of approximately $67,964.35 and $74,464.25, including GST. In my view, a fair and appropriate amount having regard to the estimated length of the appeal (of not more than one day) would be $65,000.
I propose to order that the appellant provide security for costs in the sum of $65,000 by payment into court, or in such other form of security as may be agreed between the parties in advance of a date for provision of security in that amount. The proceedings will be stayed pending the provision of such security. Mr Xenos is to pay the respondents' costs of the application for security.
The existing freezing order, as amended, made by Black J on 10 May 2016 (and extended on 15 May 2017 and 3 August 2017) has the effect of preventing Mr Xenos from disposing of his assets except for limited purposes, unless Mr Xenos and the respondents agree in writing that the specified exceptions are to be varied. As Mr Xenos has not appeared, he has not provided his agreement (in writing) to any variation of the exceptions to the freezing order.
Counsel for the respondents acknowledged that if an order for security is made, the freezing order should be varied to permit Mr Xenos to make the necessary disposition of property so as to provide any security so ordered. It is convenient that I make the required variation to the exceptions to the freezing order as a judge of the Supreme Court. No issue arises as to the lack of notice given to Mr Xenos of the terms of the proposed variation to the exceptions to the freezing order; the proposed variation is beneficial to Mr Xenos. Accordingly, the court's orders will be made on the basis that the exceptions to the freezing order will be varied to permit Mr Xenos to provide the security so ordered.
In proceeding 2017/165290, the orders of the Court will be: 1. The appellant provide within 14 days security in the sum of $65,000 for the respondents' costs of the appeal by payment of that amount into court, or in such other form as the appellant and the respondents may agree before 4 October 2017. 2. Stay these proceedings until the appellant has provided security for the respondents' costs of the appeal in accordance with order 1 above. 3. The appellant to pay the respondents' costs of the amended notice of motion dated 6 September 2017.
In proceeding 2016/80389, the orders of the Court will be: 1. The freezing orders made by the Court against the First Defendant, Timothy (Tim) Xenos (also known as Efthymios Xenos) in proceedings 2016/80389 on 14 March 2016 (as varied on 17 March 2016 and 10 May 2016 and extended on 15 May 2017 and 3 August 2017) be varied such that the exceptions in paragraph 10 to the orders be supplemented by adding sub-par (5), so that order 10 reads: "This order does not prohibit: … (5) the First Defendant from paying, or otherwise taking steps to provide out of his assets, security for the costs of the First and Second Plaintiffs (being the Respondents in proceeding 2017/165290) in proceeding 2017/165290, in the sum of $65,000".

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: 20 September 2017

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