Federal Court Grants Stay Pending Appeal with Conditions

OUTCOME: Allowed in Part

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NG 3148 of 1996

[APPELLANT]: [APPELLANT]

Applicant

[APPELLANT]: first respondent

and: [NAME] [APPELLANT]

[NAME] Respondent

[NAME] [APPELLANT]

[NAME]

[NAME] [APPELLANT]

[NAME] [NAME]-claimant

[APPELLANT]

[NAME]-respondent

[APPELLANT] OF ORDER: 20 may 1998

[APPELLANT]

THE COURT ORDERS THAT:

1. Conditionally upon the applicant providing security in a form and in an amount (subject to order 2) to be determined, failing agreement [APPELLANT] the parties, by the Court, for the judgment debt and for the respondents' costs of the appeal, orders 2 and 3 made on 5 May 1998 are stayed until the final determination of appeal proceedings NG 278 of 1998.

2. The amount of the security is to be calculated as a reasonable estimate of the costs of the respondents, calculated on the indemnity basis (a) in relation to the present application for a stay of proceedings and (b) in relation to the applicant's appeal from the orders of the Court made on 5 May 1998.

3. The stay is to take effect on and from the time when the security referred to in orders 1 and 2 is provided.

4. The parties have liberty to apply on one day's notice.

5. The costs of the motion are to be costs in the appeal. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NG 3148 of 1996

[APPELLANT]

Applicant

AND: [NAME] [APPELLANT]: FIRST RESPONDENT

AND: [NAME] [APPELLANT] Respondent

[NAME] [APPELLANT]

[NAME]

[NAME] [APPELLANT]-CLAIMANT

[APPELLANT]-RESPONDENT

JUDGE: LEHANE J

DATE: 20 may 1998

PLACE: [APPELLANT]

EX TEMPORE

REASONS FOR

JUDGMENT I have before me a motion of the applicant by which it seeks a stay of certain orders made on 5 May 1998. The orders were final orders made following the conclusion of a trial and the delivery of reasons for judgment. The trial (simplifying matters considerably but not, I think, so as to distort the issues which arise on the motion) concerned a claim by the applicant for recovery of certain money which it had paid to the respondents in purported compliance with a document described as a loan agreement [APPELLANT] the parties. The respondents [NAME]-claimed for the amount which they alleged remained due under that document. In the course of final submissions, the applicant abandoned its claim but maintained its defence to the [NAME]-claim. I held, however, that the respondents should succeed on the [NAME]-claim. The result was, as reflected in the final orders made on 5 May, that the application was dismissed and, on the [NAME]-claim, judgment was entered in favour of the respondents for a sum of $78,854.07, comprising a principal amount together with interest. I then ordered that the applicant pay the respondents' costs on the usual party and party basis. There was an order giving the respondents leave to apply for special costs from 20 August 1997 and finally there was an order for release to the respondents of an amount which had been deposited in the trust account of the applicant's solicitors by way of security for costs. That last order was not uncontroversial. It was, however, made after argument, and I understand has since been complied with. No issue now arises in relation to that last order, except, perhaps, that it should be recorded that, in the course of argument as to whether it should be made, the applicant did not press for a stay of the other orders. What the applicant now seeks is an order staying the operation of the [NAME] and the third orders of 5 May, that is the orders by which judgment was ordered in favour of the respondents on the [NAME]-claim and by which the applicant was required to pay the respondents' costs. The stay is sought pending an appeal from the orders of 5 May, in circumstances where the applicant has, with great promptness, lodged a notice of appeal. No issue arises on the appeal as to my order dismissing the claims of the applicant in its application. The appeal is concerned solely with the [NAME]-claim, and the grounds given attack the reasons for judgment on two bases: first, it is said, the reasons were wrong to the extent that they concluded that the document entitled "loan agreement" was not a sham and, secondly, it is said that the reasons were wrong to the extent that I held that the transaction of which that agreement represented part did not involve financial assistance of a kind prohibited by s 205 of the Corporations Law. It may be said of the two grounds that the former plainly involves significant issues of fact and evidence as well, perhaps, as some questions of law but that the latter may be characterised as involving a question of law as to the precise operation of provisions of the Corporations Law. That said, it should be recorded also that there was no suggestion that the grounds of appeal lacked substance. The somewhat unusual circumstances include the following. The applicant asserts, and there is no dispute about this, that it has no assets. There is evidence before me on the motion to that effect, and as to the circumstances in which the applicant ceased to have assets and ceased to trade. Some details, perhaps, are obscure but in substance the evidence is to the effect that the assets of the applicant were acquired by a company called [APPELLANT], the directors and shareholders of which are the directors and shareholders of the applicant. The assets were acquired for value, the value has been paid by credit to the applicant's [COMPANY] account and has since been spent in meeting costs arising in the course of the present proceedings. It seems - though this sits somewhat oddly with the directors' report attached to the accounts of the applicant as at 30 June 1996 - that the applicant ceased trading, and [APPELLANT] commenced trading, on about 30 June 1996. The applicant invoiced [APPELLANT] for certain of its assets, particularly stock and raw materials, some days before 30 June 1996. Payment for the assets was, however, made considerably later. I do not think that anything particularly turns upon the timing of those events, except in one respect to which I shall return. The applicant having exhausted its funds in paying costs associated with the proceedings, further costs incurred for the same purpose were, according to the evidence of the applicant's general manager, advanced to the applicant by [APPELLANT]. That company proposes to advance funds to the applicant to enable it to proceed with its appeal. The applicant has no other source of funds for that purpose. For present purposes, the result of the circumstances I have described may be summarised as follows. There are no assets of the applicant against which the respondents could levy any form of execution in order to obtain satisfaction of their judgment. The course which is available to them, and which they seek to pursue, is to make an application to wind up the applicant; they have already issued a statutory demand in order to commence proceedings of that kind. It was suggested, in submissions on behalf of the respondents, that it might be that, if the applicant were wound up, a [NAME] would be able to take proceedings to set aside transactions or recover property so as to produce a fund from which the judgment in favour of the respondents could be satisfied, at least in part. Perhaps not surprisingly in the circumstances, there was no very precise evidence as to a basis upon which a [NAME] might be able to obtain such a result. There was a suggestion made to the applicant's general manager, Mr [COUNSEL], in the course of his [NAME]-examination by counsel for the respondents, that there was a discrepancy [APPELLANT] the accounts of the applicant at 30 June 1996 as to the amount of cash at [COMPANY] and the [COMPANY] balance at that date stated in [COMPANY] pass sheets, also in evidence. Undoubtedly there is a difference [APPELLANT] the amounts stated in the account and in the [COMPANY] pass sheets. Mr [NAME] was unable to explain the difference, but there appears to be no particular reason on the material before me to suspect that the reason might be a sinister one as opposed, perhaps, simply to a difference [APPELLANT] the cash book and the [COMPANY] balances. The prejudice that might be suffered by the respondents, therefore, if I were to grant a stay may I think be fairly stated in this way: that if the applicant is wound up later rather than sooner, the prospect of recovery in respect of certain transactions, particularly those occurring in about June 1996, may be impaired. Secondly, the respondents would be compelled to expend substantial sums of money in resisting the appeal in circumstances where not only is there no prospect of recovering any funds so expended but equally there is no prospect of recovering any part of the judgment debt which they have obtained. Thus, assuming the respondents to be successful in the appeal, they will simply have paid out more money likely to be wholly irrecoverable to defend a judgment most if not all of which will equally be irrecoverable. The claimed prejudice to the applicant (if a stay is not granted) may be stated in summary form in this way. There is no source of funds to maintain the appeal other than [COMPANY]. [APPELLANT] will only provide funds to the applicant to meet its costs of the appeal. It cannot and will not provide funds to meet the judgment; it cannot and will not provide funds to a [NAME], assuming the [NAME] were prepared to continue with an appeal, additional to the costs of the appeal which it would be prepared to advance to the applicant absent liquidation. Thus, if no stay is granted, the possibility of an appeal disappears. One might ask, as the respondents do ask, why in the circumstances does that matter? The answer given by the applicant is that it matters, not because of any return in monetary terms that the applicant might expect to recover if it were successful in the appeal. It matters, it is said, because winding up itself may be regarded as a serious prejudice; winding up itself is to be regarded as a prejudice to the applicant and may be prejudicial for those who have been concerned in the management of the applicant, particularly its directors, and if the judgment ought not stand then there is no reason why the applicant or its directors should suffer that prejudice. The applicant referred also to certain matters which occurred during the course of the proceedings leading up to the trial, and in earlier winding up proceedings instituted by the respondents against the applicant which, in the end, did not proceed. It is true that the applicant during the trial pointed to aspects of the conduct of the respondents, particularly in relation to the earlier winding up proceedings, which it said were unsatisfactory. It is true also that in my reasons for judgment delivered on 18 March 1998 I accepted that there were aspects of the respondents' conduct of the winding up proceedings which were not wholly satisfactory. The suggestion was, I think, that the conduct of the respondents had substantially increased the costs incurred in the course of the proceedings and therefore contributed to the current impecunious state of the applicant. I accept the argument of counsel for the applicant that the test I should apply is that laid down in [NAME] v [COMPANY] (1985) 2 NSWLR 685, particularly at 694, 695. That test has been adopted and applied by a [ADDRESS] of this Court in [COMPANY] v [NAME] (1996) 137 ALR 498. It has been followed also at first instance in this Court in [NAME] v [COMPANY] (1996) 136 ALR 593. Broadly speaking the effect of those authorities is that special circumstances or extraordinary circumstances are not required to be shown before a stay will be granted pending appeal. The discretion is a broad and general one. The court will consider each application on its merits. There is some onus on the applicant for a stay to demonstrate that there are circumstances justifying the stay, but in the end the question is one which has been described in some of the cases as involving a balance of convenience and is concerned particularly with the relative prejudice to each of the parties, depending upon whether a stay is granted or withheld. In the rather unusual circumstances of this case, I accept, substantially for the reasons advanced by the applicant, that the winding up of the applicant should be regarded as a relevant prejudice; particularly, it would be likely in the circumstances to result in the appeal not proceeding. So far as the respondents are concerned, I am inclined to place little weight upon the consideration that a deferral of winding up may reduce the prospects of substantial recoveries which might otherwise be made by a [NAME]. There is no material before me which points particularly to any clearly likely source of recovery and one is permitted, I think, to know from experience that proceedings of the sort contemplated are frequently difficult and almost always expensive; and in the present circumstances it is, I think, appropriate to form a tentative view that the prospect that they may be thought by a [NAME] likely to prove worthwhile may be somewhat remote. On the other hand I do regard as an important consideration the fact that a stay is sought in circumstances where the respondents have recovered a judgment which, on the applicant's own evidence, cannot be satisfied and where successful resistance of an appeal would require the incurring of substantial further costs, in turn irrecoverable. Given that the benefit sought by the applicant from a stay is not, as the applicant's counsel described it, of a commercial kind (by which I take him to have meant a pecuniary kind), I do not think that the respondents should be put to that further expense without substantial protection by way of security. It was put to me in the course of argument that the questions of stay, and of security in the event of a stay, were separate questions which must be dealt with separately and successively. Counsel for the applicant conceded that, if a stay were granted, it would be appropriate to order the provision of security for the costs of the appeal. But he submitted that the question of security ought to be approached on the footing that, if the respondents were successful on the appeal, in the ordinary course they would recover their costs of the appeal on a party and party basis: accordingly any security afforded to the respondents ought to be calculated by reference only to the respondents' likely party and party costs of the appeal. That might, no doubt, be appropriate in a case where there is some prospect that if an appeal fails the respondent will obtain, at least in part, the fruits of its judgment. It must not be forgotten, however, that it is by no means uncommon for a stay to be made conditional upon some security given to a respondent for the judgment debt as well as for costs. Whether that is appropriate in any case depends, of course, upon the particular circumstances. In my view, in the present case, I ought not grant a stay unless the respondents have at least what may reasonably be regarded as adequate security for additional costs which they have incurred and will incur following the making of the orders of 5 May. In circumstances where all the applicant seeks to do, by the appeal, is relieve itself of a debt which I have found to be due which, in any event, it has no assets to meet, it would be wrong, in my view, to put the successful respondents further out of pocket in the event that the appeal fails. That necessarily leads, I think, to one of two results. One is that the stay would simply be refused; and I have hesitated over whether that is the appropriate order or whether, on the other hand, I should adopt what seems to me to be the alternative: that a stay would be granted, but conditionally upon the provision to the respondents of security both for their costs of the appeal and for the judgment debt, the amount of the security being calculated as a fair estimate of the costs of the respondents, calculated on the indemnity basis, in relation to the present application for a stay and in relation to the appeal. In the end, my conclusion is that if I make an order of that latter kind the respondents are adequately protected; and if that condition were met, then I think it would be appropriate to grant a stay. I shall hear the parties as to the precise form of the order but in substance what I propose is that I would stay the operation of orders 2 and 3 made on 5 May but on the condition as I have mentioned, and on the footing that the stay would take effect when the security has been provided. I contemplate that the amount and form of the security would, failing agreement [APPELLANT] the parties, be determined by the Court. [DISCUSSION WITH COUNSEL ENSUED] I make the following orders:

4. The parties have liberty to apply on one day's notice.

5. The costs of the motion are to be costs in the appeal. I certify that this and the preceding seven (7) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Lehane

Associate: Dated: 29 May 1998

Counsel for the Applicant: [redacted]

Solicitor for the Applicant: [redacted]

Counsel for the Respondents: [redacted]

Solicitor for the Respondents: [redacted]

Date of Judgment: 20 May 1998