Phoenix Constructions (Qld) Pty Ltd v McCracken
[2011] QCA 259
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- Phoenix Constructions (Qld) Pty Ltd v McCracken[2011] QCA 259
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Phoenix Constructions (Qld) Pty Ltd v McCracken[2011] QCA 259
Phoenix Constructions (Qld) Pty Ltd v McCracken[2011] QCA 259
SUPREME COURT OF QUEENSLAND
CITATION: | Phoenix Constructions (Qld) Pty Ltd v McCracken [2011] QCA 259 |
PARTIES: | PHOENIX CONSTRUCTIONS (QLD) PTY LTD |
FILE NOS: | Appeal No 6056 of 2011 SC No 5615 of 2006 |
DIVISION: | Court of Appeal |
PROCEEDING: | Application for Security for Costs Application for Stay of Execution |
ORIGINATING COURT: | Supreme Court at Townsville |
DELIVERED EX TEMPORE ON: | 27 September 2011 |
DELIVERED AT: | Brisbane |
HEARING DATE: | 27 September 2011 |
JUDGES: | Margaret Wilson AJA |
ORDER: | Delivered ex tempore on 27 September 2011 In Appeal No 6056 of 2011:
In Appeal No 6056 of 2011: Order that the application be dismissed with costs. |
CATCHWORDS: | APPEAL AND NEW TRIAL – APPEAL – PRACTICE AND PROCEDURE – QUEENSLAND – SECURITY FOR COSTS – where the appellant and the company of which he was the sole director and shareholder (“the company”) entered into a construction management agreement with the respondent for the development of land – where the respondent served a creditor’s statutory demand on the company – where the respondent commenced proceedings – where a judge of the Trial Division gave judgment for the respondent against the appellant for $2,025,212.17 – where the appellant filed a notice of appeal – where the respondent applied for security for costs of the appeal – whether the appeal has prospects of success – where a judge of the Trial Division granted the respondent a freezing order restraining the appellant from disposing of, dealing with or diminishing the value of his shareholding in a number of related companies and restraining the related companies from disposing of their interests in certain lands – where the appellant had not completed and returned to the respondent a statement of his financial position pursuant to r 807 of the Uniform Civil Procedure Rules – whether the appellant should be ordered to provide security for costs APPEAL AND NEW TRIAL – APPEAL – PRACTICE AND PROCEDURE – QUEENSLAND – STAY OF PROCEEDINGS – where the appellant filed a cross-application for a stay of execution pending the appeal – whether a stay should be granted |
COUNSEL: | D D Keane for the appellant D A Savage SC for the respondent |
SOLICITORS: | Walsh Halligan Douglas for the appellant Connolly Suthers Lawyers for the respondent |
MARGARET WILSON AJA: On 15 June 2011 Cullinane J gave judgment for Phoenix against Jarrod McCracken in the sum of $2,025,212.17. On 12 July 2011 Mr McCracken filed a notice of appeal. On 1 September 2011 Phoenix filed an application for security for costs of the appeal, ancillary orders and an order directing Mr McCracken to file and serve an outline of argument (or a supplementary outline) compliant with paragraphs 14 and 15 of Practice Direction 2 of 2010.
On 7 September 2011 Mr McCracken filed a cross-application for a stay of execution pending the appeal. The applications came before me on 13 September 2011. They were adjourned part heard. Since then both parties have submitted more material, including more written submissions, and there have been brief oral submissions this morning.
I should explain the background. Jarrod McCracken's wife owned land. Coastline Constructions (Aust) Pty Ltd was a company of which Jarrod McCracken was the sole shareholder and director and also the secretary. Mrs McCracken and Coastline entered into a joint-venture agreement for the development of the land.
On 7 September 2004 Coastline entered into a construction management agreement with Phoenix. By clause 16 of that agreement, following development the owner (Mrs McCracken), was to retain lots marked on a plan in Schedule 2 described as "retained lots". Schedule 2 was left blank.
On 16 June 2006 Phoenix served a creditor's statutory demand on Coastline. Subsequently Phoenix commenced this proceeding against Coastline for damages for breach of the Construction Management Agreement. In January 2007 a mediation concluded without resolving the dispute. In the course of the mediation Mr McCracken said, "I will not be paying anything, and I can close the company down if I need to."
On 19 February 2007 Coastline and Mrs McCracken entered into a deed amending the joint venture agreement – inter alia by inserting Schedule 2 containing six units to which a value of $7,385,000 was ascribed. On 28 February 2007 Mr and Mrs McCracken were added as parties to the litigation. In mid-2010 Coastline went into liquidation, and in early 2011 Mrs McCracken became bankrupt.
The proceeding went to trial against Jarrod McCracken (the third defendant) only.
As against him Phoenix claimed:
"Further or alternatively and pursuant to section 1324 of the Corporations Act 2001 an injunction requiring the Third Defendant to procure from the second defendant [Mrs McCracken] a transfer to the first defendant [Coastline] and/or requiring the second defendant to transfer to the first defendant that real property identified by and referred to at paragraph 59 of the Statement of Claim;
Further or alternatively, damages of $1,230,614.79 pursuant to Section 1324(10) of the Corporations Act 2001."
The trial judge found that Coastline gained valuable rights in relation to the joint venture lands which could be used only for the purposes of the joint venture and which could not be alienated. Phoenix's case was that by the agreement of 19 February 2007 Jarrod McCracken procured Coastline's abandonment of the contractual interest which it had under the joint venture agreement in the joint venture lands to the extent of the lands described in Schedule 2. Phoenix, to which Coastline was liable for breaches of contract, was denied recourse to Coastline's assets insofar as they consisted of rights in relation to the units in Schedule 2. There was nothing to suggest that Coastline had other assets which could have satisfied the indebtedness.
This conduct of Jarrod McCracken was held to be in breach of s 182 of the Corporations Act. Phoenix was a creditor whose interests were affected by Jarrod McCracken's breach of s 182. The trial judge found that Phoenix was entitled to restrain such conduct pursuant to s 1324, and that by subsection (1) of that section the court could grant damages in substitution for the injunction.
The issues on appeal concern:
(a)whether s 1324(10) conferred a right to damages upon a creditor for that creditor's loss suffered by reason of contravention of s 182;
(b)whether the power to award damages in substitution for an injunction arose when there was no prospect of an injunction being granted;
(c)whether Phoenix was a person affected within the meaning of s 182; and
(d)other questions in relation to the measure of damages and rulings on the admissibility of evidence concerning the breach of s 182.
When the present applications came before the court on 13 September 2011, Phoenix's counsel conceded that the appeal was not necessarily unarguable. In written submissions since filed he has submitted that there are no identifiable prospects of success. Suffice it to say, in my view the appeal is arguable, and that is a factor relevant to both the application for security for costs and the application for a stay.
Mr McCracken has delivered his outline of argument. Phoenix's outline is overdue. Phoenix's counsel submitted that Mr McCracken's outline identifying the points of appeal was insufficient. His complaint was that the outline does not deal with submissions before the primary judge or his Honour's reasons for upholding Phoenix's contentions about s 1324. He complained that the outline does not deal with a recent decision of the Full Court of the Federal Court or other recent cases. He complained that Phoenix would have to deal with these by way of reply to Mr McCracken's submissions.
As I indicated on 13 September, I am not prepared to order delivery of a further outline of submissions. The matters raised by counsel for Phoenix go to the strength of the appeal. Depending upon the subsequent course of the outlines and the course of the appeal itself, the complaint may sound in costs.
I turn to the application for security for costs of the appeal. The Court has an unfettered discretion whether to order security for the costs of the appeal. Relevant factors include the prospects of the appeal, the appellant's financial position, the cause of any impecuniosity, that he has had his day in Court and lost, any delay in making the application and that it is generally considered inappropriate to order greater security than is absolutely necessary.
That the appellant is a natural person is not as powerful a factor against ordering security at the appellate level as it is at the trial level. Mr McCracken concedes that he does not presently have liquid funds capable of satisfying the security sought ($53,000). However, he claims that he and related entities have access to real property assets.
Mr McCracken's counsel submits that an order for security would stifle the appeal. He submits that there is a public interest in the resolution in a timely way of the matters raised on appeal because they can concern the construction of important provisions of the Corporations Act. That may well be so, but Phoenix has a judgment against Mr McCracken for in excess of $2 million, a judgment which he has made no attempt to satisfy.
There are bankruptcy proceedings pending against Mr McCracken. Phoenix filed a bankruptcy notice consequent upon the judgment of Cullinane J. Attempts to serve it were unsuccessful and a petition was presented relying on s 40(1)(c) of the Bankruptcy Act 1966 – that Mr McCracken had been absenting himself or keeping house with intention to defeat or delay his creditors. After the petition was filed, the bankruptcy notice was served by being placed under Mr McCracken's door. The time for compliance with it has passed.
On 14 September 2011 Mr McCracken filed an application in the Federal Magistrates Court for a stay of the bankruptcy proceedings pending determination of the appeal to this court. That application was heard on 20 September 2011 and the decision has been reserved.
On 13 July 2011 Cullinane J granted Phoenix a freezing order restraining Mr McCracken from in any way disposing of, dealing with or diminishing the value of his shareholding in a large number of related companies, the entirety of the real property owned by the companies Crackers CBD Projects Pty Ltd and Crackers Corporation Pty Ltd, the business owned and conducted by Crackers Broadbeach Pty Ltd, known as "The Consortium Townsville (a nightclub)", and a business owned and conducted by Crackers Corporation Pty Ltd, known as "Northtown on Flinders".
The order did not prohibit the respondents from payment of ordinary living expenses, payment of reasonable legal expenses, dealings and dispositions in the ordinary and proper course of the respondents' business, dealings and dispositions in the discharge of obligations bona fide and properly incurred under a contract entered into before the order was made (subject to a notice provision), and further it was expressed to cease to have effect if Mr McCracken and the various companies paid the sum of $2,025,212.17 into court or into a bank account in the name of their solicitor and Phoenix's solicitor, or provided security by a method agreed in writing.
The present applications came before the court, as I say, on 13 September 2011. At that time there was an application pending before the Trial Division in Townsville arising out of an alleged breach of the freezing order. Mr McCracken was given leave to file and read an affidavit of his solicitor, Mr Slasberg, in which he deposed to The Consortium nightclub being worth $6.2 million, but encumbered only to the extent of $2.9 million. The application was adjourned.
As I understood the position then, there were two properties in issue. The alleged breach of the freezing order related to a property described as Unit 2039/1 Mariners Drive, which was the subject of a contract of sale. The second, The Consortium nightclub, was not the subject of a contract of sale.
The property the subject of the contract was that referred to in paragraph 4(d)(i)(A) of the freezing order. It was subject to a mortgage to Suncorp Metway Ltd. Further, there was a caveat over the property in favour of Cashflow Advantage Australia Pty Ltd. The court was told that the sale price was $680,000 and that $650,000 was to be paid to Suncorp Metway, leaving an equity of $30,000. That was to be paid in reduction of a liability to the Melbourne Storm Rugby League Club Limited of approximately $400,000 for legal costs. It seems that the Melbourne Storm's insurer, HDR Gerling, was subrogated to the rights of the club. By a compromise deed the amount was to be paid in full by March 2012. Crackers CBD Projects Pty Ltd guaranteed the liability of Jarrod McCracken.
The second property, the nightclub, is at 159/165 Flinders Street, Townsville. It is on two parcels of land, one freehold and one leasehold, held by Crackers CBD Projects Pty Ltd. The business is owned and conducted by Crackers Broadbeach Pty Ltd. There was a valuation of the land and business as at 3 March 2010 of $6.2 million. A title search revealed that the freehold property was subject to a mortgage to Suncorp Metway Limited and that Cashflow Advantage Australia Pty Ltd had a caveat over the property. Further, there were fixed and floating charges over the assets of Crackers CBD Projects Pty Ltd in favour of Suncorp Metway and Cashflow Advantage Australia.
Crackers CBD Projects Pty Ltd's accountant, Mr Crofts, has now sworn an affidavit saying that the company has net assets of $4.3 million. However, the unaudited balance sheet to which he refers is a balance sheet of CBD Projects Discretionary Trust. It shows net assets of $4.497 million. According to Mr Crofts the mortgage to Suncorp Metway secures a loan of $2.905 million, and the charge in favour of Suncorp Metway secures a line of credit to the extent of $650,000. The balance sheet also refers to another liability to Suncorp Metway described as "Sterling and Mariners Loan" in the sum of $1.2 million.
According to Mr Crofts Crackers Broadbeach Pty Ltd has net assets of $875,000. However, the principal assets include a loan owing by Crackers Corporation of $870,000, fittings and fixtures of $236,620, and refurbishments of $112,524. The liabilities include a loan from Suncorp Metway in the sum of $875,000.
In short, the material does not allow me to be confident that either of those companies would be in a position to satisfy any order for costs made against Jarrod McCracken.
On 15 September 2011 the application in relation to the alleged breach of the freezing order came before North J. By consent his Honour made an order allowing the sale of the property alleged to constitute the breach to proceed and allowing the sale of another property noted in the freezing order. Paragraph 2 of his Honour's order was as follows:
"Nothing in the order made 13 July 2011 precludes any of the respondents providing security for the respondent Jarrod McCracken's costs of Court of Appeal Proceeding No 6056 of 2011."
Jarrod McCracken is the defendant in at least four separate proceedings commenced against him in Queensland courts by the Deputy Commissioner of Taxation, Equity Trust Limited, Perpetual Trustee Company Limited, and Australia and New Zealand Banking Group Pty Ltd. The proceedings commenced by Perpetual Trustee Company Limited are for $1.9 million; those proceedings are presently undefended.
Mr McCracken owns no real estate and no motor vehicles. National Australia Bank has taken possession of the motor vehicle used by him and his wife. From his own material it is clear that he owes approximately half a million dollars in legal fees – over $400,000 to the Melbourne Storm Football Club, and over $35,000 to his own lawyers.
Notwithstanding requests made pursuant to rule 807 of the Uniform Civil Procedure Rules and consequent upon the judgment, he has not completed and returned to Phoenix a statement of his financial position.
In the circumstances I am satisfied that his financial position is parlous, to say the least.
As I have already recorded, Coastline is in liquidation and Mrs McCracken is an undischarged bankrupt. Receivers have been appointed to three items of real property owned by Crackers Corporation Pty Ltd. While the freezing order restrains the disposition of certain assets and so provides Phoenix with some comfort, it is not security for the costs of the appeal.
In my view the application for security for costs ought to be granted. As I indicated during the hearing on 13 September 2011, I am not minded to grant security in the total amount claimed ($53,000), but I consider there should be an order for security in the sum of $40,000.
I turn then to the application for a stay pending appeal. The court has a discretion whether to grant a stay of execution pending the appeal, and ultimately it is a question of whether it is an appropriate case in which to do so. Relevant factors include whether the appellant has an arguable basis for the appeal and whether there is a risk that the respondent could not repay the judgment debt. As I have said, I consider that the appeal is arguable.
Mr McCracken's counsel submitted that if he were declared bankrupt, he would be prejudiced in a way that could not be remedied, even if the appeal was continued by the Trustee in Bankruptcy successfully and the bankruptcy was subsequently annulled or he was discharged from bankruptcy. I note this submission which seemed to go to his capacity to be a director of companies and the personal opprobrium which would accompany bankruptcy. However, it is my impression that even without this litigation Mr McCracken’s financial position is parlous, and I do not think that this submission ultimately works in his favour to any great extent.
On the material there is no reason for concern that Phoenix would not be able to repay the amount of the judgment. Indeed, when the matter came before the Court on 13 September 2011, its counsel said that if necessary it would give an undertaking to hold any sum it recovered on the judgment debt in trust to abide the outcome of the appeal. On the material Phoenix has expended more than $1 million in relation to this litigation. It has previously proffered undertakings as to damages which have been accepted without question. It is a construction company which has undertaken major projects since 2008, including projects worth $8.21 million in 2010 and $17.43 million in 2011.
Mr McCracken's counsel has pointed to the prospect of interest pursuant to s 48 of the Supreme Court Act 1995 running while the judgment remains unpaid. However, in all the circumstances the prospect of Phoenix actually recovering such interest is remote. In my view the balance of convenience weighs heavily against the grant of a stay. Accordingly, I make the following orders.
On the application made by Phoenix –
(a)an order that by 12 October 2011 Jarrod McCracken provide security for the costs of the appeal in the amount of $40,000 in a form satisfactory to the Registrar;
(b)a further order that the application for delivery of a further outline of submissions on behalf of the appellant be dismissed;
(c)a further order that the costs of the application be reserved.
On the application brought by Jarrod McCracken, I make an order dismissing the application with costs.