Supreme Court New South Wales

• Medium Neutral Citation: In the matter of 82 - 84 Belmore Street Pty Ltd (in liquidation) [2014] NSWSC 1701
• Hearing dates: 24 November 2014
• Decision date: 24 November 2014
• Jurisdiction: Equity Division - Corporations List
• Before: Black J

Decision

Orders made that the application be dismissed and the Respondents' costs of and incidental to the Further Amended Interlocutory Process and the application to set aside the summonses for examination and orders for production be assessable and paid forthwith.

• Catchwords: CORPORATIONS - examinations relating to insolvency - application for setting aside or staying of examination summons and orders for production - whether examination summons and orders for production should be set aside or stayed.; PROCEDURE - costs - general rule that costs follow the event - whether reason shown to depart from general rule - whether costs should be payable forthwith.
• Legislation Cited: - Corporations Act 2001 (Cth) s 588FF; - Supreme Court (Corporations) Rules 1999 (NSW) rr 1.10 11.5; - Uniform Civil Procedure Rules 2005 (NSW) r 12.11
• Cases Cited: - BP Australia Ltd v Brown [2003] NSWCA 216; (2003) 58 NSWLR 322; - Fortress Credit Corp (Australia) II Pty Ltd v Fletcher [2014] NSWCA 148; (2014) 308 ALR 166; - McMahon v Gould (1982) 7 ACLR 202; - Re Kassem (as liquidators of Clarecastle Pty Ltd) [2011] NSWSC 490
• Category: Interlocutory applications
• Parties: Ozem Azzam Kassem and Daniel Juratowich as liquidators of 82 - 84 Belmore Street Pty Ltd (in liq) (Plaintiffs/Respondents); Sarkis Nassif, Jean Nassif, Bernadette Nassif, Adrian Staltari, Vincent Michael Aboud and Robert Bounassif, Wells St Properties Pty Ltd, By the Bay Investments Pty Ltd and Meadow Real Estate Pty Ltd, Barry Johnson and Associates Pty Ltd, Vincent M Abboud Pty Ltd, Holdmark Finance Co Pty Ltd, Property Investors Alliance Pty Ltd and Paramonte Legal (NSW) Pty Ltd (Defendants/Applicants)
• Representation: Counsel: B K Nolan (Applicant); M Condon SC/S Clemmett (Respondents); Solicitors: Somerset Rickman's Lawyers (Applicants); Sage Solicitors (Respondents)
• File Number(s): 2014/274960

Judgment - EX TEMPORE

1 By Further Amended Interlocutory Process filed 17 November 2014, the Applicants seek to set aside or alternatively to stay several summonses for examination and orders for production which have been issued to companies associated to individuals and companies in and associated with the Nassif family and to an accounting firm. The application is made under r 12.11 of the Uniform Civil Procedure Rules 2005 (NSW), which provides that the Court may, relevantly, set aside an Originating Process.

2 An initial question arises as to whether an extension of time should be granted to bring the relevant application. The summons for examination issued to several parties appear to have been issued largely from 2 October 2014, although two summons appear to have been issued at earlier dates, and orders for production were issued from 8 October 2015. Rule 11.5 of the Supreme Court (Corporations) Rules 1999 (NSW) provides that any application for discharge of an examination summons is to be made within three days of the service of that examination summons, although the Court would have the power to extend that time or to dispense with the application of the rules. Ms Nolan, who appears for the Applicants, submits, and I accept, that the merits of the application may well be relevant to whether that rule should be dispensed with, or the time for the application extended under r 1.10 of the Supreme Court (Corporations) Rules.

3 In the present case, there is no evidence that goes to an explanation of the delay in bringing the application to set aside the examination summons, but that does not ultimately seem to me to be a matter that is determinative. Both parties, sensibly, received it on the basis that the extension of time application should be determined in conjunction with the substantive application, and that in turn allows the Court to have regard to the merits of the application in determining the matter. Having regard to the views which I have formed as to the merits of the application, as set out below, it seems to me that the application does not have sufficient likelihood of success to warrant a grant of leave and that, combined with the absence of explanation of the delay, is such that the Court should not extend the time for bringing the application under the relevant rule. For that reason, I do not extend the time to bring the applications to set aside the summonses for examination and orders for production or grant leave for those applications to be brought out of time.

4 The application is supported by affidavits of Mr Sarkis Nassif dated 5 November 2014 and Ms Eleanor Crawford dated 20 November 2014 and by a further affidavit of Mr Martin Rosenblatt, a solicitor for the Applicants, dated 24 November 2014 annexing further correspondence between the Australian Tax Office ("ATO") (the relevance of which emerge below), the Applicants' solicitors and the liquidator's solicitors.

5 Mr Nassif's evidence is that 82 - 84 Belmore Street Pty Ltd (in liq) ("the Company") was placed in voluntary liquidation in April 2012 and that it forms part of a group known as the Holdmark Group which is controlled by Mr Nassif and members of his family. He was a director of the Company until 2 April 2012, the day before it was placed in voluntary winding up. Mr Nassif's evidence, which is supported by the liquidator's evidence to similar effect, is that the Company was formed to undertake a commercial and residential development at Meadowbank, which was undertaken with the involvement of several related entities which acquired the relevant land, borrowed from a financier and undertook construction. The project was plainly of a very substantial scale, involving a large number of residential and commercial units and having initially been funded by a construction loan facility of some $85 million, and was completed in November 2010. Mr Nassif accepts that, in December 2010 and February 2011, the Company transferred 18 units to related entities, 11 of which have been sold. Seven of those units are subject to caveats lodged by the liquidators, the operation of which has been extended by orders made by this Court.

6 Mr Nassif refers to a report to creditors issued by the liquidators in April 2012 which, at that time, indicated that the ATO was a creditor for an amount in the order $419,000, Holdmark Finance, an associated entity, was a creditor for $5 million and two individuals were creditors in small amounts. Mr Nassif indicated that the ATO's subsequent claim of $1.285 million, which is the subject of a proof of debt, is not "accepted" by him, although he does not explain the basis of his disagreement with that claim. He refers to an audit process involving the Holdmark Group and the ATO and indicates that, if the audit results in no liability owed by the Company to the ATO, his intention is to procure that Holdmark Finance would waive its debt of $5 million and he refers to his understanding that the two individual creditors would also waive their debts owed by the Company. That outcome must be understood as no more than a possibility because, of course, it depends upon the contingency that the audit in fact discloses no liability by the Company to the ATO. He refers to an alternate possibility that, if the ATO "determines correctly" that the tax liability is of a particular amount, it is "anticipated" that Holdmark Group will pay that liability although the Company is in liquidation and also waive its own claim. Ms Nolan submits, and I am prepared to assume, that the words "determines correctly" either refer to an objectively correct determination by the ATO, or a determination that is shown to be correct after an appeal process, or arises from that real process, rather than being directed to Mr Nassif's subjective understanding of the correctness of the ATO's determination.

7 It seems to me that these propositions are in any event somewhat contingent, with the first contingency being whether the ATO will determine that there is no liability, triggering the possible waiver of the $5 million debt by Holdmark Finance, which in turn depends upon whether that debt can in fact be waived by that entity, consistent with its directors duties to that entity and its creditors, in an appropriate case; and to the circumstances in which a "correct" determination by the Australian Tax Office would arise, so as to have the Holdmark Group discharge it, and as to the amount of that "correct" determination, which would in turn be relevant to the Holdmark Group's capacity to discharge it, as to which there is no evidence.

8 Mr Nassif in turn expresses a concern that the liquidator's proposed examinations, which are scheduled to take place over the five days in December, will "needlessly expend funds in bringing recovery actions, whilst ostensibly for the benefit of creditors, before the liquidators have even established that there are any creditors in the winding up of the company and in what amount." I should note that that proposition cannot be taken too far, because it is plainly not the case that the liquidators' examinations are, as a matter of course, adjourned until the point at which a liquidator has finalised the determination of, for example, all proofs of debt lodged in liquidations. I did not understand Ms Nolan to put the case put by the Applicants on that basis, and it turns on a more subtle balancing of advantage and disadvantage in the relevant circumstances.

9 The Applicants also rely on an affidavit of Ms Eleanor Crawford, the financial controller of the Holdmark Group, which outlines the progress of the ATO's audit of Mr Nassif and the Holdmark Group which has been continuing since 2013, and refers to a series of meetings between those entities, and expresses the view that it is possible that discussions with the ATO will be "put on hold" if the examinations proceed, and seeks to have the examinations deferred "for a few months" to avoid that result. I should note that Ms Crawford's evidence rather assumes, without establishing, that the examinations and discussions with the ATO are in fact binary alternatives, such that only one or other of them might proceed at the same time. It is by no means clear that both could not proceed, and indeed that the examinations might not, in some circumstances, focus the parties' minds upon the relevant discussions with the ATO as to promote their prospects of success. It is, in any event, a matter for the Company and its accountants whether or not they seek to put discussions with the Australian Tax Office "on hold" if examinations were to proceed. There is no obvious reason for the ATO to do so since it is not party to the examinations and it is not apparent that its role in the discussions would be affected by those examinations going forward.

10 The Applicants also rely on an affidavit of Mr Rosenblatt to which I referred to, which annexes correspondence with the ATO, and in turn raises the possibility of a mediation, which may now have been organised between the parties. It appears no final arrangements had been reached, at the time of that affidavit, since the ATO was seeking certain undertakings by Mr Nassif and associated parties that they would not dissipate assets. Ms Nolan has indicated, on instructions, that it may be that those undertakings have been or will be given and I will proceed on that basis. The ATO was asked to, but did not, indicate its position as to any further application made by the liquidators to extend time under section 588FF of the Corporations Act 2001 (Cth) and I will return to that question below.

11 The liquidator in turn relies on an affidavit of Mr Mark Hutchins dated 17 November 2014. Mr Hutchins is a registered liquidator and has day-to-day carriage of investigations into the Company's affairs. He refers to the Company's history, and again leads evidence that indicates the scale of the relevant development, involving the sale of 348 units, with a total sale price in excess of $163 million, and he refers to sales to related parties at which, on his understanding (in evidence which was admitted as limited to his understanding), was at an undervalue.

12 Mr Hutchins sets out, at some length, the relationships between the relevant individuals who are examinees and the companies within the Holdmark Group and also refers to the position as to caveats which have been lodged by the liquidators over several units. Mr Hutchins also gives evidence as to the position of the ATP which has, as I noted above, lodged a proof of debt for $1.285 million and then indicates (in evidence also admitted as evidence of his understanding only) that the liquidators' investigations have led the liquidators to believe that the Company did not pay tax in respect of sales of units exceeding $173 million in value. I am conscious, of course, that that is not proof of the relevant fact, but that understanding itself indicate why a liquidator might well understand that the proper performance of his duties required the conduct of liquidators' examinations in a matter of this kind. Mr Hutchins also refers to different calculations of liability for income tax of the Company by its accountant, of $1.9 million, and by the liquidators in excess of $10 million. He refers to service of a clearance notice by the ATO indicating an estimated claim of $32 million although Ms Nolan points out, and I accept, that this service of that notice is not proof of the fact.

13 Mr Hutchins in turn refers to potential prejudice to the liquidators of an adjournment or a stay of the liquidators' examinations, including that five days have presently been allocated for those examinations in early December 2014; the next available examination dates are April 2015; and a three year limitation period expires on 2 April 2015; and a stay of the examinations would leave the liquidators without sufficient time to complete their investigations and commence proceedings within that limitation period.

14 It is implicit in that evidence, and explicit in the liquidators' submissions, that the liquidators are concerned that they would be left to the risk of seeking an extension of time under s 588FF of the Corporations Act. That risk is not trivial, for various reasons. First, the Applicants foreshadowed that they will undertake to consent to such an extension of time and I will proceed on that basis. However, as Ms Nolan fairly accepts, such an undertaking only assists the liquidators if the Applicants are the persons against whom the proceedings will be brought. It does not assist the liquidators in claims against related parties, who might not themselves be applicants, who may have received proceeds of the transactions and it also does not assist in claims against third parties who are not under the Applicants' control, but whose role may emerge from liquidators' examinations. There is a further difficulty in respect of third parties, so far as the question whether the Court can grant an extension of time, in the form of a shelf extension as the Court of Appeal's decision in Fortress Credit Corp (Australia) II Pty Ltd v Fletcher [2014] NSWCA 148; (2014) 308 ALR 166, is presently the subject of an appeal in the High Court of Australia, which will reconsider the correctness of the question of BP Australia Ltd v Brown [2003] NSWCA 216; 58 NSWLR 322 in that regard.

15 Turning to the basis on which a stay of the examinations would be granted, Mr Condon, who appears with Ms Clemmett for the liquidators, draws attention to the decision of Ward J in Re Kassem (as liquidators of Clarecastle Pty Ltd [2011] NSWSC 490, where her Honour referred to the decision in McMahon v Gould (1982) 7 ACLR 202 and noted the observations of Wootten J as to when the Court would grant a stay, which recognised a plaintiff's right to have his action tried in the ordinary course of the procedure and business of the Court, and to the significance of an interference with that entitlement.

16 In the present case, it is important to recognise that the Applicants do not suggest that the examinations are not undertaken for a proper purpose. They instead suggest, in effect, that the examinations are a waste of money, because ultimately events might develop in a manner that there are no creditors of the Company because the ATO is not a creditor, or is paid out, and Holdmark Finance forgives, and the other individuals forgive, their relevant loans. That, of course, is a possibility. It must be recognised, however, that it is also possible that might not occur. It might not occur because the ATO asserts a substantial liability, which is not accepted by Holdmark Group as correct, and further disputes continues to that matter. It might not occur because the amount of any liability, correctly determined, is an amount that the Holdmark Group does not consider it ought to pay, or that the Holdmark companies are unable to pay in the proper exercise of their directors' duties. It might not occur because other claims arise in the course of the liquidation. There was some reference before me, but the evidence is scant, as to the position of the Office of State Revenue in that regard.

17 Ms Nolan submits, in effect, that it is preferable that the ATO audit be allowed to be completed, in anticipation that the Holdmark Group will pay the tax liability owed by the Company in liquidation and waive its claim in the liquidation. She submits that that process should be given priority over any examinations, although that must depend on an assessment of any prejudice which the liquidators would suffer by reason of a deferral of the examinations. Ms Nolan submits that the Court has power to extend time to bring an application under s 588FF of the Corporations Act. That is plainly so in respect of a claim against an identified creditor. It has been understood to be so in respect of claims as against unidentified creditors, but that is the question which the High Court may reconsider in the Fortress Credit Corp appeal. The Court must, of course, exercise a discretion in that regard, and one of the matters which has been recognised in respect as relevant to that discretion is the public interest in claims being brought against third parties within that three year period, so they are not left in a position of uncertainty.

18 One of the oddities of this application is that a liquidator who seeks to put himself in a position where he could bring such claims within the three-year period which the Corporations Act contemplates, is sought to be prevented from doing so, so as to be left to bring such application for extension of time. It seems to me that, notwithstanding Ms Nolan's submission to the contrary, there is prejudice to the liquidator from deferring the examination, not least because the liquidator will then be left to the risk of bringing an application under s 588FF of the Corporations Act, which might be opposed by related companies other than the Applicants or opposed by third parties and might not be successful (depending upon the outcome of the appeal in Fortress Credit Corp) as against persons who have not then been identified as potential defendants.

19 Ms Nolan also submits it is preferable that the parties be left to proceed with negotiations with the ATO since that might lead to a successful resolution without the need to incur the costs of the examination. That seems to me, however, as Mr Condon pointed out, a matter that is a further matter for the liquidator as to whether to incur those costs, in effect to protect himself against the contingencies that negotiations with the ATO do not lead to such a result, and he may bring any proceedings that are appropriate within the three year limitation period. It is by no means apparent that it would not be a reasonable judgment on the part of the liquidator to consider the costs of such examinations were warranted against the contingency that the negotiations would in fact not succeed.

20 For all these reasons, I am not satisfied that the examinations should be stayed at this point. First, it seems to me that the conduct of those examinations is a course that is open to the liquidator and I have noted it has not been suggested they are undertaken for an improper purpose. It seems to me within the proper realm of the liquidator's commercial judgment to proceed with those examinations against the contingency there will be no wider settlement with the ATO and as to avoid the risks involved in an application under s 588FF of the Corporations Act. It seems to me that proceeding with those examinations is consistent with the public policy recognised in the cases, including those under s 588FF of the Corporations Act, that a liquidator should take proper steps within the three year period to be placed in a position to either commence proceedings or not do so. I am also not satisfied on the evidence before me that the negotiations with the ATO or examinations are true alternatives, in the sense that the examinations proceeding will necessarily preclude any discussions between the Company, its accountants, the liquidators and the ATO. For all these reasons, and in circumstances that the liquidator has properly invoked the processes of the Court and has in the ordinary course an expectation that his proceeding should be heard, I am not prepared to stay the examinations or set aside or stay the orders for production of documents.

21 The application should be dismissed and the Applicants should pay the liquidator's costs.

22 Two further issues were subsequently raised by the parties. The first is an extension of an order standing over the orders for production which have been stood over to today to a further date. The Applicants have sought seven to fourteen days. An extension of fourteen days would plainly be undesirable and, as Mr Condon pointed out, would not give sufficient weight to the length of time for which these orders for production have already been on foot in circumstances, where they would bring the matter to the date on which the examination is due to take place. The orders for production were issued in late October 2014 and the Applicants would not have been entitled to simply disregard those orders in the hope they may be set aside. If, of course, it has not occurred, then it is likely that the parties will be well advanced in preparing documents for production. I stand over the order for production before the Registrar at 9 am on 1 December 2014.

23 An order was also sought that costs be payable forthwith. The circumstances in which orders can be paid that costs be paid forthwith are well-established by the case law and they are the exception rather than the rule. They will normally be made in circumstances where an application involves a discrete issue and where it will be some time before the proceedings as a whole are resolved. Ms Nolan points out with some force that the substance of the liquidator's claim has been that the examination should proceed in the week commencing 6 December 2014 so that those examinations may be completed within a relatively short time. Mr Condon responds, also with some force, that in the matters arising from those examinations it may in turn lead to further examination or further orders for production.

24 It seems to me that this application was a wholly discrete application. It has, in substance, nothing to do with the matters which will arise in the examinations, which are an investigative exercise, and instead turned on the exercise of the discretion to defer the examination. There is at least the possibility that the matters may continue at least until the early new year, depending on the existence of further orders for examination or orders for production. On balance, it seems to me that this is a proper case for an order that the liquidator be entitled to proceed to assess and be paid their costs forthwith. In the ordinary course, any assessment will take some time so such an order is not likely to have any immediate impact between now and when the examinations take place.

25 Accordingly, I make the following orders:

1. The application be dismissed.

2. Applicants pay the liquidators' costs.

3. The liquidators' costs of and incidental to the Further Amended Interlocutory Process and the application to set aside the summonses for examination and orders for production be assessable and paid forthwith.

4. Stand over the orders for production to 9am on 1 December 2014 before the Registrar.

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Decision last updated: 03 December 2014